On August 18, 2023, Ross Stores Inc (ROST, Financial) recorded a daily gain of 5.93%, pushing its 3-month gain to 13.97%. The company's Earnings Per Share (EPS) stand at 4.51. But does this financial performance align with the stock's intrinsic value? Is the stock fairly valued? This article presents an in-depth valuation analysis to answer these questions.
Company Overview
Ross Stores Inc (ROST, Financial) is a leading American off-price apparel and home fashion retailer. As of the end of fiscal 2022, the company operates over 2,000 stores under the Ross Dress for Less and dd's Discounts banners. Ross Stores targets to undercut conventional retailers' regular prices by 20%-70% by offering a variety of name-brand products. The company's unique, flexible merchandising approach, coupled with a low-frills shopping environment, enhances inventory turnover and traffic, enabling its low-price strategy. The company's sales in fiscal 2022 were majorly driven by home accents (26%), ladies' department (24%), menswear (15%), accessories (14%), shoes (12%), and children's (9%). All sales were made in the United States.
Understanding the GF Value
The GF Value is a proprietary measure that reflects the stock's current intrinsic value. This value is derived from historical multiples, GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line on the company's summary page gives an overview of the fair value at which the stock should ideally be traded. If the stock price is significantly above the GF Value Line, it is overvalued, and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
At its current price of $119.77 per share, Ross Stores has a market cap of $40.80 billion. The stock appears to be fairly valued based on the GuruFocus Value calculation. Therefore, the long-term return of its stock is likely to be close to the rate of its business growth.
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Financial Strength
Investing in companies with poor financial strength carries a higher risk of permanent loss. The cash-to-debt ratio and interest coverage provide a good understanding of a company's financial strength. Ross Stores has a cash-to-debt ratio of 0.77, better than 58.75% of companies in the Retail - Cyclical industry. The company's overall financial strength is 7 out of 10, indicating fair financial health.
Profitability and Growth
Investing in profitable companies carries less risk. A company with high profit margins typically offers better performance potential than a company with low profit margins. Ross Stores has been profitable for 10 years over the past 10 years. Over the past 12 months, the company generated revenues of $18.90 billion and Earnings Per Share (EPS) of $4.51. Its operating margin of 10.49% is better than 80.35% of companies in the Retail - Cyclical industry. Overall, GuruFocus ranks Ross Stores' profitability as strong.
Growth is one of the most important factors in the valuation of a company. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Ross Stores is 6.8%, which ranks better than 59.48% of companies in the Retail - Cyclical industry. However, the 3-year average EBITDA growth is 0.7%, which ranks worse than 66.63% of companies in the Retail - Cyclical industry.
ROIC vs WACC
Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Ross Stores' return on invested capital is 21.53, and its cost of capital is 9.75.
Conclusion
In conclusion, the stock of Ross Stores appears to be fairly valued. The company's financial condition is fair, and its profitability is strong. However, its growth ranks worse than 66.63% of companies in the Retail - Cyclical industry. For more detailed financial information about Ross Stores, you can check out its 30-Year Financials here.
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