It’s retail month in the stock markets, so it’s a great time to look at one of the premier names in the industry. It’s not one that comes up in many conversations about the best retailers, but it should.
Ross Stores (NASDAQ: ROST) has racked up an impressive 11% gain in the past month, and a 55% gain tin the past year, about 10 times better than the broad market, showing that a handful of companies are crushing the competition in this tough environment by having strong game plans and executing effectively.
With over 1,000 retail locations in 27 states and Guam, Ross has positioned itself as a leading retailer of discount apparel and home goods. Headquartered in the San Francisco Bay area, the $7.5 billion behemoth operates two chains: Ross Dress for Less, which are large-format stores at medium-sized malls, and dd’s DISCOUNTS, which are small-format stores aimed at young families in neighborhood strip malls.
When you look at what the company has been able to accomplish, rising 650% since 2000, well past rivals like TJX Cos. (NYSE: TJX) and Wal-Mart Stores (NYSE: WMT), it’s an amazing story. Executives have focused on generating a gusher of cash flow by keeping debt low, picking good spots for stores and offering department store overstock at tremendous discounts. With a great logistics platform, its buying offices in the heart of the clothing industry in Los Angeles and New York are able to respond to fashion trends with amazing speed.
Ross store personnel seek out product overruns and canceled order goods to stock inventories of in-season items. In this way, it has profited from the forecast errors of higher-end counterparts including Nordstrom (NYSE: JWN) and Macy’s (NYSE: M). Most notably during the recession, as sales of luxury goods took a hit, ROST has emerged a winner by appealing to consumers seeking designer and brand-name options at rock-bottom prices.
No single store accounted for more than 1% of sales in 2009, which shows the broad geographical appeal of name-brand clothing at low prices. Ross has expanded its retail operations from 2007 to 2009 by 26% while competitors were cutting back.
Board chairman Norm Ferber and CEO Michael Balmuth have worked together at the helm of the company for 15 years. Together, they have 44 years of experience in merchandising and management. Analysts attribute much of Ross’ success to their efforts. The two executives have been very focused on improving shareholder value, implementing a regular program of stock repurchases. The latest effort extends the buybacks into 2011. The firm also pays a 1% annual cash dividend.
The company reported last week that third-quarter earnings rose 16% on wider-than-expected margins. For the quarter ended Oct. 30, Ross reported a profit of $121.4 million, or $1.02 a share, up from $105.1 million, or 84 cents a share, a year earlier. The company two weeks ago gave its earnings view a sharp boost — to $1.01 to $1.02 share — because of better-than-expected sales and margins during October.
Gross margin rose to 27.2% from 26.3% partly because of improved distribution costs. Two weeks ago, Ross reported that sales rose 7% to $1.87 billion as same-store sales rose 3%. A year earlier, sales rose 12% and same-store sales rose 8%.
ROST said recently that it has seen large increase in first-time buyers recently and is working on retaining their loyalty. Turns of new merchandise have been increased to six times a week from three in the expectation that it will increase visits from customers looking for a bargain.
When you find a well-managed company that is reasonably priced in an improving industry which has low expectations, you usually have a solid intermediate-term winner. ROST is growing at around 15% a year yet its price-earnings multiple is just 13x. I expect its P/E to rise to around 16x over the next year, which would put the price north of $75 from its current perch at $64. It’s a buy on dips.
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