Ross Stores is the second-largest off-price retailer of apparel and home accessories in the US, after TJ Max (TJX). I put Ross into the idea pipeline as one of my “legacy” stocks. The company currently trades at ~$54
1- Business Performance Risk (+) and intrinsic returns (+)
ROST’s performance is good overall but I find the FCF/sales ratio a bit low but it is probably driven by the company’s low margin business. However ROE/ROA’s are a sign of good business performance which is also underscored by the company’s profitable growth over the last 10 years.
In terms of returns to shareholders, ROST pays a small dividend and has done about 3% share buybacks per year while accumulating cash.
Going forward returns could be:
- 1.1% from dividends (using 15% of earnings)
- A minimum growth of 6% (using an ROE of 30%, this would use only 20% of earnings)…
- leaving the remainder (65%) available for repurchases, or another 5% of the stock – based on the current earnings yield of 8%
This leads us to a potential intrinsic return of 12%+, depending on ROST’s ability to grow its top line at a higher rate
2- Balance Sheet Risk (+)
ROST carries very little Balance Sheet risk given its low debt and reasonable current ratio
3- Valuation Risk
The current valuation appears to be quite low at less than 10x Free Cash Flow to enterprise value and a P/E below that of the market’s for a company that has grown consistently at 10%+!
Conclusion
ROST appears to be a potential candidate for continued investment as it offers interesting internal return prospects couple with low balance sheet risks and very attractive valuation. As I will perform a Company Analysis however I will try and compare the company’s FCF/sales to others in the same industry.
1- Business Performance Risk (+) and intrinsic returns (+)
| Metric | Status |
| FCF / Sales | Last twelve months (LTM): 8.1%, at the high end of ROST’s performance over the last 10 years; between 2 and 6% except in 2010 when the company reached 10% |
| ROE | LTM: 45% higher than the company’s performance over the last 10 years (between 23% and 40%) and the five year average of 30% |
| ROA | LTM: 19%, after having ranged between 11% and 17% over the last 10 years |
| Revenue Growth | ROST’s 10-year growth is very consistent between 11 and 13% |
| Cash distribution to shareholders | Ross currently pays a yield of 1.1%, below the S&P 500, with a payout ratio of about 15%. ROST is a constant purchaser of shares, having bought back 17% of its stocks over the last 5 years |
In terms of returns to shareholders, ROST pays a small dividend and has done about 3% share buybacks per year while accumulating cash.
Going forward returns could be:
- 1.1% from dividends (using 15% of earnings)
- A minimum growth of 6% (using an ROE of 30%, this would use only 20% of earnings)…
- leaving the remainder (65%) available for repurchases, or another 5% of the stock – based on the current earnings yield of 8%
This leads us to a potential intrinsic return of 12%+, depending on ROST’s ability to grow its top line at a higher rate
2- Balance Sheet Risk (+)
| Metric | Status |
| LT Debt / Equity | LTM: 0.1x – Ross carries very little debt |
| Current Ratio | LTM: 1.5x vs. historic range of 1.4x to 1.6x |
3- Valuation Risk
| Metric | Status |
| Cash Return | 10.5%, a high return! |
| P/E | 12.8x, below the company’s 5 year average of 16.6x |
Conclusion
ROST appears to be a potential candidate for continued investment as it offers interesting internal return prospects couple with low balance sheet risks and very attractive valuation. As I will perform a Company Analysis however I will try and compare the company’s FCF/sales to others in the same industry.
