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Tuesday July 27, 2010
Ross Stores (ROST): For bargain buyers
by Richard Moroney, editor Dow Theory Forecasts  Ross Stores (ROST), which is up 27% this year, is one of the best-performing retail stocks in the S&P 500 Index. But the shares still represent a good value at 14 times trailing earnings, 19% below the five-year average P/E. The company operates two discount chains, Ross Dress for Less and dd’s DISCOUNTS, which aim to provide a constant flow of fresh merchandise for cash-strapped consumers. Between 75% and 80% of Ross Dress for Less shoppers are women, usually from middle-income households. They look for brand-name clothing, home supplies, and accessories at sharp discounts. These shoppers tend to enjoy the treasure-hunt format, which drives them to visit the stores an average of three times a month. The roughly 970 Ross Dress for Less stores typically occupy 30,000 square feet in suburban centers, mostly in the southern and western states. 
Launched in 2004 in California, dd’s tends to attract a younger demographic with a lower income. The more than 50 dd’s stores are located in California, Texas, Florida, and Arizona. Management views the chain’s expansion as a long-term growth opportunity. Stores at both chains carried leaner in-store inventories in the last two quarters. This strategy offers several advantages: faster inventory turnover, fresher product mixes, lower working capital, and fewer markdowns. The use of opportunistic buying helps shield Ross from economic downturns. The strategy has proven particularly useful in recent months, reflecting weakness in consumer spending. Many retailers place inventory orders four months in advance, and some chains are apparently trying to cut or defer orders. Ross makes its purchases later in the buying cycle, which allows the retailer to scoop up such unwanted inventory — at a deep discount, of course. Off-price retailers have held up better than most over the last year, and Ross believes consumers will continue to seek out bargains. The company plans to expand its store base 4% to 5% this year, adding about 35 Ross stores and 15 dd’s. The company has no presence in the Midwest or New England, so it has plenty of opportunities for expansion. In fiscal 2010 ended January, revenue rose 11% as same-store sales grew 6%. So far this year, sales climbed 12% for the fi ve months ended June, with same-store sales up 8%. Ross generated free cash flow of $617 million, or $4.98 per share, in the last four quarters, up 56% from year-earlier levels on wider operating margins. Ross is a Focus List Buy and a Long-Term Buy. Learn more about this financial newsletter at Richard Moroney's Dow Theory Forecasts. |
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