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Consumer spending is the key to the viability of any economy and the health of the retail industry is an important economic indicator. Sales gains for U.S. retailers in recent months mainly reflect an improving job market and stronger household finances that helped consumers, which helped the economy overcome higher taxes and gasoline prices.

However, when the consumer still has economic concerns, they tend to spend less and shop for better prices. This is evident in the growing sales at discount retailer Ross Stores (ROST). Based on future earnings projections, Ross stock has a potential for a 20% upside increase in price.

For the five weeks ended April 6, 2013, Ross Stores reported that sales increased 6% to $1.036 billion up from $980 million for the five weeks ended April 7, 2012. Comparable-store sales for the five weeks ended April 6, 2013 rose 2% compared to a 10% increase for the five weeks ended March 31, 2012.

For the nine weeks ended April 6, 2013, sales grew 4% to $1.762 billion, up from $1.687 billion for the nine weeks ended April 7, 2012. Comparable-store sales for the nine weeks ended April 6, 2013 increased 1% versus a 10% gain for the nine weeks ended March 31, 2012.

Ross states it is forecasting a 5% to 6% increase in April comparable-store sales. Based on quarter-to-date results, and the revised outlook for April, Ross now projects earnings per share to be slightly above the high-end of the previous range of $1.00 to $1.04 for the 13 weeks ended May 4, 2013. This updated forecast compares to $.93 for the 13 weeks ended April 28, 2012.

On March 21, 2013, Ross Stores Inc. reported its fourth-quarter net income jumped 23 percent, helped by higher demand from shoppers looking for bargains. For the quarter ended February 2, Ross earned $236.6 million, or $1.07 per share, up from $192 million, or 85 cents per share, in the same quarter last year. Revenue rose 15 percent to $2.76 billion from $2.4 billion.

The results matched Wall Street predictions. Analysts, on average, expected a profit of $1.07 per share on $2.76 billion in revenue, according to FactSet.

For the full year 2012, Ross earned $786.8 million, or $3.53 per share, up from $657.2 million, or $2.86 per share, in 2011. Revenue increased to $9.72 billion from $8.61 billion.

Ross has a current dividend yield of 1.13%, which is generally overlooked by dividend investors. However, Ross has increased the dividend 21.5% in the past year and has a 5-year average annual growth rate of 29%. Ross has a low 15% dividend payout ratio that has significant room to grow in the future.

Consumers remain sensitive to macro-economic factors including interest rate hikes, increases in fuel and energy costs, credit availability, unemployment levels and high household debt levels, which may negatively impact their discretionary spending, and in turn, adversely affect the growth and profitability of retail companies. This will benefit the discount retailers and Ross Stores is well positioned to be a leader in this market.

Consensus earnings estimates for 2014 are $3.87, which is a 9.63% year-over-year increase from 2013. For 2015, earnings are projected to be $4.35, a year-over-year increase of 12.4%.

Ross shares are up over 20% year to date but are still below the 52-week high of $70.80 from last August. Ross is currently trading at a P/E ratio of 17, which is 15% below the industry average. Based on the industry average P/E and forward earnings, Ross Stores has a 12-month price target of $77.50.

Source: Ross Stores Continues To Beat Sales Estimates