Ross Stores Inc. (ROST, Financial) operates as off-price retail apparel and home fashion store in the United States under the brand name of Ross Dress for Less and dd's DISCOUNTS. The company offers apparel, accessories, footwear and home fashions with 1,172 stores in 33 states, the District of Columbia and Guam.
Ross’ first brand Ross Dress for Less stores sells its product at an everyday savings of 20% to 60% off department and specialty store regular prices mostly to middle income households. The other brand, dd’s DISCOUNTS, primarily focuses a more moderate income household at an everyday savings of 20% to 70% off moderate department.
Better Than Expected Third Quarter Results
Ross Stores has posted better than estimated third quarter results. According to analyst estimates, the company has surpassed the estimated net sales of $2,554 million to $2,599 million, an 8% increase over the previous year.
Net earnings per share have also increased by 16% year-over-year, surpassing the analyst estimate of 87 cents. There was a similar impact on the company’s operating margin which improved by 11.8%, mainly because of a better management of cost of goods sold and SG&A.
The company has expanded its operations with the opening of 95 new stores; 75 are ROSS stores and 20 are dd’s DISCOUNTS stores. I believe the company has a clear strategy of managing its cost and at the same time expanding its operations and providing a greater reach to its customers. Based on the company’s outlook for 2014, we can estimate 11% increase in the company’s net earnings for fiscal 2014 over the last year.
Holiday Quarter Supports Rise in Earnings Outlook
The company has delivered better than expected results and I believe that with the coming holiday quarter, Ross stores have the opportunity to again beat its estimated net earnings growth of 11%.
The company’s estimate of a comparable store sales growth of 1-2% for fiscal 2014 looks conservative as there has already been a growth of 4% compared to last year and an expected growth from holiday season is expected.
The stock can therefore move higher if it beats analyst estimates and strong results on the back of festive season will also take the stock higher.
Significant Growth Opportunities
Ross Stores is present in only 33 states with dd’s DISCOUNTS present in 15 states. The company aims to increase its store count to 2,500 in the long term from the present 1,172. I believe with the company’s strategic allocation of capital expenditure, Ross Stores will be able to achieve its target of 2,500 stores soon.
The 2014 capital expenditure allocation has proved to be fruitful with the addition of a total of 95 new stores. Further, the company’s current strategy would help Ross to continue to increase its stores and at the same time maintain and improve its existing stores.
The company’s sales have grown from $4 billion in 2005 to nearly $11 billion, and this is primarily because the company has focussed on value shopping. After the recession, middle class income has been severely hurt and this has helped the company position itself in the right segment.
dd’s DISCOUNT is an example which targets the younger and more moderate income groups. I believe this concept will have a winning effect on the company’s growth as the stores performance has been increasing over the years with comparable store growth of 4%.
Source: Company Presentation
The company’s balance sheet looks healthy with almost no debt; this also gives the flexibility and ease of credit. Positive free cash flows suggest that there is enough cash generation to return to shareholders.
In fiscal 2014, the company has increased its dividend by 18% to $0.20 per share, compared to 20% increase in fiscal 2013. The company’s consistent approach in creating shareholder value looks impressive and I believe with a well thought-out strategy to increase sales, Ross Stores has the potential to grow and provide better returns to its investors.
Conclusion
Ross Stores stocks have declined early this year. However, the company’s effort has translated into good numbers, and the stock has been growing tremendously. Though there has been a high jump in its stock price, I still believe Ross stores can be considered for exposure.
This is primarily because there is enough scope for the company to grow, not only in U.S, but in countries like India and China, which has tremendous growth opportunities. The company has been increasing its dividend every year, which is another positive key investment highlight.
