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Ross Stores: A Solid Valuation and Prospects Make It an Enticing Investment

June 12, 2014 | About:
kcpl

kcpl

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Ross Store’s (ROST) recent results were decent and were in line with the company’s expectations. However, the company failed to report growth in its revenue and earnings, which declined marginally. As a result of macro economic uncertainties prevailing in the market, Ross posted a cautious outlook for 2014. In addition, Ross faces tough competition from retail giants such as Wal-Mart (WMT) and other off-price retailers like TJX Companies (TJX).

Let us have a look at Ross Store’s prospects and if it is worth your dollars?

More than the results

Ross’ quarterly revenue fell to $2.74 billion from $2.76 billion in last year’s fourth-quarter. As a result of ongoing weakness, the company’s net profit fell from $236.6 million to $218 million. Despite woes, the company expects sales to grow 1% to 2% in the first quarter of the current fiscal year.

However, despite not so impressive results, Ross can be a profitable investment due to many concrete points. The company is strong in various segments of its business. For example, its dd’s Discounts stores are performing exceptionally well due to their cheap rates, which are driving sales and profits higher. To maintain this pace, Ross is planning to increase the number of dd’s Discounts stores to 500 in the long run.

Ross also has a solid share repurchase program of $1.1 billion by the end of 2014, which will strengthen the cash position of the company. However, It had already purchased 8.2 million shares worth $550 million last year, and expects to complete the remaining by the end of this year. This move by Ross will surely benefit its earnings in the long run by 10%-12%. This will also lead to an improvement in the dividend payout of the company. The buyback will also provide some much-needed boost to the company since it is struggling to post solid growth numbers.

Ross wants to play safe in the future due to unfavorable macroeconomic challenges and a stiff retail environment. It is relying heavily on its off-pricing strategy by maintaining lean inventory levels, enabling it to provide fresh and exciting merchandise to customers.

Competition is increasing

The competition in the market is increasing. Many players such as Wal-Mart are very aggressive with their operations to gain traction in this growing market. Wal-Mart is opening new small stores and its moves in the past suggest that a giant like Wal-Mart will try and make the most of the opportunity that it gets.

Moreover, a good 5% increase in the Wal-Mart's same-store sales has encouraged the company to open smaller stores. As a result of this, it has doubled the number of stores it was planning to open in 2015. Wal-Mart is also investing heavily in the online. With such moves, Wal-Mart hopes to increase online sales in the future.

Another competitor in the league is TJX, which, according to recent news, is investing a lot in supply chain initiatives. It is offering low-priced and attractive items to customers. TJX focuses on a strategy of purchasing items close to requirement, hence avoiding the ill-effects of markdowns. TJX is also increasing its stores aggressively, as it plans to grow its store count to 3,200 stores this year. In the long run, the company is planning to increase its store count by 50% in markets where it is currently plying its trade.

Conclusion

Looking at the ratios, with a trailing P/E of 18.67 and a forward P/E of 15.45, Ross Stores is cheaper than its peers. Moreover, its dd’s Discounts stores have been doing well and with another 100 new stores to be opened this year, Ross will continue its steady growth going forward.

However, investors need to be careful of Ross’ competitors, and see how the company responds to the threats of Wal-Mart, TJX, and other players, as these can hurt its performance going forward.


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