The latest global economic indicators show encouraging albeit uneven progress. In the U.S., unemployment is falling while consumer sentiment and spending are rising in tandem with housing prices.
But silver linings always come with a dark cloud — and these days, the long shadow is political dysfunction in Washington, D.C. That’s why investors as well as consumers are curbing their enthusiasm, despite positive economic news. This pervasive anxiety underscores the wisdom of picking stocks for the demonstrable strength of their underlying businesses.
One such investment right now is Ross Stores, Inc. (ROST), a retailer that benefits from good times but also provides protection against unexpected shocks — such as, let’s say, a Republican-led shutdown of the federal government. This discount chain sells branded apparel that’s reduced 20%-70% from retail prices, making its clothing appealing for consumers who want to spend money but are wary of what the future might bring.
Ross stock is a proven survivor of hard times. Notably, during the Great Recession’s nadir in 2008, ROST stock gained roughly 18% while the S&P 500 plummeted 37%. Since then the store has been on a roll, as its earnings report this week demonstrates (see below).
As of this writing, Ross’ retail empire encompasses 1,210 “Ross Dress for Less” stores and 152 “dd’s Discounts” outlets situated in strip malls. Dress for Less is designed for middle-class consumers; dd’s is targeted toward lower incomes. But make no mistake: Ross isn’t simply an upscale version of Salvation Army thrift stores; its merchandising strategy is shrewd and savvy.
Ross Stores employs more than 500 seasoned fashion buyers with several years’ experience in retail procurement, chiefly in fashion hubs such as Manhattan and Los Angeles. These intermediaries possess a discerning eye for trends and leverage their long-standing relationships with about 8,000 clothing vendors. The result is a rewarding customer experience: fashionable clothing for a very cheap price. At the same time, Ross keeps a tight rein on inventory and supply chain costs. Major Ross competitors, such as TJX Companies Inc (TJX), aren’t as tightly focused and operate more as generic discounters.
ROST Stock: Where Profits are in Fashion
Ross this week reported third-quarter fiscal 2014 results that beat expectations. ROST stock earnings per share (EPS) came in at 93 cents, an increase of 16% compared to the same period a year ago and higher than management’s guidance of 83-87 cents. EPS also blew past Wall Street’s estimate of 87 cents. Net sales reached $2.59 billion, for a year-over-year increase of 8%, above analysts’ expectations of $2.55 billion. For the fourth quarter, management reiterated its guidance for EPS growth of 1%-2% and full-year EPS of $4.28–$4.32.
ROST stock is showing ample room for future growth. During the quarter, the company hit its goal of unveiling 95 new stores. The company also has plenty of wherewithal to finance its ambitious expansion; it ended the quarter with a cash hoard of $571.6 million. Also in the quarter, the company bought back 1.9 million shares for roughly $141 million, bringing share repurchases so far this year to about 5.9 million for a total of $418 million. The company’s target is to buy another $550 million worth of shares by the end of fiscal 2014.
As the holiday season kicks into gear and bargain-hunting shoppers flock to its stores, Ross Stores should experience further increases in sales and profits. In today’s mercurial investment climate, ROST stock is properly attired for success.
As of this writing, John Persinos did not hold a position in any of the aforementioned securities.
