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Shares of Ross Stores (ROST) rose more than 2.5% over the past trading week. The off-price retail apparel operator reported its third quarter earnings on Wednesday.

Third Quarter Results

Ross Stores reported third quarter revenues of $2.26 billion, up 10.8% on the year, boosted by comparable sales growth of 6%. Revenues fell short of analysts expectations of $2.32 billion.

Operating margins rose 35 basis points to 11.3%. Margins rose on the back of higher merchandise margins, lower distribution costs and operating sales leverage.

The company grew net earnings by 11% to $159.5 million. Earnings per share rose 14% to $0.72 per diluted share. Earnings fell short compared to analysts consensus of $0.81 per share.

For the first nine months of 2012, Ross Stores repurchased 5.4 million shares for a total consideration of $334 million. The company expects to buy back another $116 million in stock during the fourth quarter, completing its two-year $900 million repurchase program.

CEO and Chairman Michael Balmuth commented on the results, "We are pleased with the strong sales and earnings increases we generated in the third quarter and first nine months of 2012. Our better-than-expected results year-to-date were driven by our ongoing ability to offer shoppers a fresh and exciting array of compelling name brand bargains for the family and the home. In addition, operating our stores on lower inventories while strictly controlling expenses continues to enhance profit margins."

Outlook

For the fourth quarter of its fiscal 2012, Ross Stores guides for same store sales growth of 1 to 2%. Earnings per share are expected to come in between $0.99 and $1.04 per diluted share, which includes a $0.08-$0.09 benefit due to the fact that the quarter has 14 working weeks.

CEO Balmuth commented, "Our focus on bargains continues to make our stores attractive destinations for value-conscious customers. During the holiday season, however, it is always difficult to predict how promotional other retailers may become or how current macro-economic and political uncertainties may impact consumer spending."

Valuation

Ross Stores ended its third quarter with $625 million in cash, equivalents and short term investments. The company operates with $150 million in long term debt, for a net cash position of $475 million.

For the first nine months of 2012, Ross Stores generated revenues of $6.96 billion. The company net earned $550.2 million, or $2.46 per diluted share. Full year revenues could come in around $9.5 billion. The company could earn around $780 million, or $3.50 per diluted share.

The market currently values Ross Stores at $12.0 billion. This values operating assets around $11.5 billion. Based on the outlook for its annual 2012, this values the firm at 1.2 times annual revenues and 14-15 times annual earnings.

Ross Stores currently pays a quarterly dividend of $0.14 per share, for an annual dividend yield of 1.0%.

Investment Thesis

Year to date, shares of Ross Stores have risen 13%. Shares steadily rose from $47 in January to highs of $70 in August of this year. From that point in time shares fell back some 25%, currently exchanging hands at $54 per share.

From lows of $12 in 2008, shares steadily rose to all time highs of $70 earlier this year. Between 2008 and 2012, Ross Stores boosted annual revenues from $6.5 billion to an estimated $9.5 billion this year. Net income rose from $305 million to an estimated $780 million over the same time period. The company retired roughly 15% of its shares outstanding during the same time period.

Shares have seen a significant pullback since I last took a look at the company's prospects in August. Shares do offer more value given the recent pullback. The company has demonstrated strong comparable sales growth, margin expansion and earnings growth. A strong balance sheet gives more room for future share repurchases, thereby accelerating earnings per share growth.

Long term investors could be buyers on dips.

Source: Ross Stores - A 25% Pullback Offers Opportunities For Long-Term Investors