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Shares of Ross Stores (ROST) have seen a great start to 2013. The operator of off-price apparel and home fashion stores reported strong same store sales growth for the important December month on Thursday.

A Strong End To 2012

Ross Stores reported that total sales for the last five weeks of 2012 rose 11% on an annual basis, coming in at $1.276 billion. Growth was driven by a solid 6% increase in same store sales.

For the first eleven months of 2012, sales rose 11% to $9.05 billion. For the entire period, same store sales rose by 7%.

CEO and Chairman Michael Balmuth commented on the results for the December month, "We are pleased with December same store sales that were ahead of our expectations for a 2% to 3% increase. These gains were on top of our most challenging sales comparison of the year and demonstrate the ongoing resilience of our off-price model as we continue to attract value-conscious shoppers with our wide assortments of compelling name brand bargains."

Looking Ahead

The better than expected sales and margins trends make the company confident for its fourth quarter earnings. Based on 1 to 2% expected increase in same store sales for January, earnings per share for the quarter ending in February are expected to come in between $1.05 and $1.06 per share.

Previously, Ross Stores guided for quarterly earnings of $0.99 to $1.04 per share for the final quarter of the year. Analysts expected Ross Stores to guide for fourth quarter earnings of $1.04 per share.

Valuation

Ross Stores ended its third quarter of 2012 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 reported a net profit of $550.2 million for the period, or $2.46 per diluted share. Full year revenues could come in around $9.6 billion on which the firm is expected to earn around $3.50 per share, or $785 million.

The market values Ross Stores at $13.1 billion after Thursday's jump. As such, operating assets are valued around $12.6 billion. This values the shares at roughly 1.3 times annual revenues and 16-17 times annual earnings.

Ross Stores pays a quarterly dividend of $0.14 per share at the moment, for an annual dividend yield of approximately 1.0%.

Some Historical Perspective

Shares of Ross Stores have seen some movement in 2012. Shares rose from $47 in January to highs of $70 in August. Shares sold off some 30% from that point in time to levels in the low fifties in December, and jumped back to $59 at the moment.

Long term holders have seen great returns with shares steadily rising from $12 in 2008 to all time highs of $70 in 2012. Between 2008 and 2012, Ross Stores increased annual revenues by roughly 50% to an expected $9.6 billion. Net income rose much sharper from $305 million in 2008 to an estimated $785 million for 2012. In the meantime, the company repurchased roughly 15% of its shares, thereby boosting earnings per share even more.

Investment Thesis

Investors applaud the December sales report. Same store sales rose 6% in the important holiday month, after growth has slowed down to 2% in November.

The dismal November sales report was the main reason behind the continued slump in Ross' shares. At the time, when shares traded around $54 in November, I argued that shares did offer more value at those levels. The strong history of comparable sales growth, margin expansion and earnings per share growth makes shares appealing, supported by a strong balance sheet.

Shares rose more than 10% from that point in time. I remain cautiously optimistic and suggest buying on dips. While a weak economy drives cost-conscious shoppers to Ross Stores, the company's execution remains very strong.

The strong performance should not be taken for granted. On Thursday, shares of discount store operator Family Dollar Stores (FDO) lost 13.0% as profits disappointed on higher markdowns. This once more proves that favorable market conditions alone are not enough and gives credit to Ross Stores' management which already has a very good long term track record.

Source: Ross Stores - Shares Spike Up On Strong December Sales