Seeking Alpha
, FAST Graphs (3,285 clicks)
Long/short equity, growth, dividend growth investing
Profile| Send Message|
( followers)  

Value Conscious Shoppers Drive Growth

Ross Stores, Inc. (NASDAQ:ROST) is the second largest off-price retailer, with fiscal year 2009 sales of over $7.2 billion. In fiscal 2008, ending January 31, 2009, in the throes of one of the most severe recessions on record, Ross Stores, Inc. grew earnings by over 20%. Then in fiscal 2009, ending January 31, 2010 they followed this incredible performance by increasing earnings another 50% over 2008 results. OnThursday, April 8, 2010 they announced that sales of stores open at least a year grew 14% in March.

Ross Stores, headquartered in Pleasanton, California, operates over 950 Ross “Dress For Less” stores in 27 states and 54 dd’s Discounts stores in California, Texas, Florida and Arizona. Figure 1 below from their March 2010 investor overview shows a lot of room for potential growth in yet untapped markets.

Figure 1. ROST Store Distribution by State
Figure 1. ROST Store Distribution by State (click to enlarge)

(Click to enlarge)

In today’s press release they said they saw increased traffic in their stores with strong sales in their shoe, home and dress departments. Figure 2 below shows that ladies (dresses) and home are their two largest segments, which augur well for future growth.

Figure 2. ROST Merchandise Mix
Figure 2. ROST Merchandise Mix (click to enlarge)

(Click to enlarge)

Ross Stores' key demographic is a female who is shopping for herself and other family members. Making up 75-80% of total traffic, this important customer finds brands important and enjoys the Ross “treasure hunt” format for finding bargains. The dd’s Discounts concept, launched in 2004, targets a younger customer from households with more moderate income levels than Ross.

Even though off-price discount retailers were top performers in 2009, Ross Stores distinguished itself against its closest competition in that category. Under the thesis that earnings determine market price and dividend income, companies with the best records of growing earnings should logically generate the best shareholder returns.

Figures 3a and b through 6a and b below look at Ross Stores versus its three closest competitors. As you review these graphs, keep in mind that each example operates in essentially the same business and is compared through the identical time frame and economic environment. Only TJX Companies, Inc. (NYSE:TJX) comes even close to Ross Stores’ success, a real testament to how well Ross is managed.

Figure 3a and b show that Ross Stores' exceptional earnings growth of 15.4% rewarded shareholders with over 19% capital appreciation and a modest starting dividend that has grown and compounded with earnings.

Figure 3a. ROST 11yr EPS Growth Correlated to Price
Figure 3a. ROST 11yr EPS Growth Correlated to Price (click to enlarge)

(Click to enlarge)

Figure 3b. ROST 11yr Dividend and Price Performance
Figure 3b. ROST 11yr Dividend and Price Performance (click to enlarge)

(Click to enlarge)

Figures 4a and b show that TJX earnings growth and shareholder returns were also above average. However, they were not as strong as those of Ross Stores.

Figure 4a.TJX 11yr EPS Growth Correlated to Price
Figure 4a.TJX 11yr EPS Growth Correlated to Price (click to enlarge)

(Click to enlarge)

Figure 4b. TJX 11yr Dividend and Price Performance
Figure 4b. TJX 11yr Dividend and Price Performance (click to enlarge)

(Click to enlarge)

Figures 5a and b show that Big Lots' (NYSE:BIG) record of earnings growth and shareholder returns were weaker and less consistent than those of Ross or TJX.

Figure 5a. BIG 11yr EPS Growth Correlated to Price
Figure 5a. BIG 11yr EPS Growth Correlated to Price (click to enlarge)

(Click to enlarge)

Figure 5b. BIG 11yr Dividend and Price Performance
Figure 5b. BIG 11yr Dividend and Price Performance (click to enlarge)

(Click to enlarge)

Figures 6a and b show that Stein Mart, Inc. (NASDAQ:SMRT) was unable to generate the strong results of Ross Stores or TJX in the same time frame and economic environment..

Figure 6a. SMRT 11yr EPS Growth Correlated to Price
Figure 6a. SMRT 11yr EPS Growth Correlated to Price (click to enlarge)

(Click to enlarge)

Figure 6b. SMRT 11yr Dividend and Price Performance
Figure 6b. SMRT 11yr Dividend and Price Performance (click to enlarge)

(Click to enlarge)

The Future

Thursday Ross Stores, in addition to reporting strong March sales, also raised guidance for sales and earnings for the year. This caused their stock price to open strongly in an otherwise generally weak market opening. For the full year the company expects to generate earnings between $4.09 and $4.24, up from current analysts’ consensus estimates of $3.95 for the year. Figure 7 below calculates consensus prior to the announcement. Fiscal 2010 and 2011 estimates are highlighted below the graph in red and the total estimated return above the graph is highlighted in red as well.

Figure 7. ROST 5yr Consensus Earnings Estimates
Figure 7. ROST 5yr Consensus Earnings Estimates (click to enlarge)

(Click to enlarge)

Figure 8 below calculates future earnings and dividends based on ROST's updated guidance. Earnings for fiscal 2010 are plotted at $4.16 the midpoint between $4.09 and $4.24 which management guided to. This suggests a much stronger total return than previous guidance implied. The updated guidance is highlighted in yellow below the graph, with the total estimated return highlighted as well.

Figure 8. ROST 5yr Earnings Estimate Updated Guidance
Figure 8. ROST 5yr Earnings Estimate Updated Guidance (click to enlarge)

(Click to enlarge)

Conclusion

We believe the evidence validates Ross Stores, Inc. as best-of-breed in the off-price retailing space. In addition to superior earnings growth they generate industry-leading returns on equity and capital.

Their balance sheet is strong, allowing them to increase their dividend by 45% in January 2010, their 16th consecutive annual increase. Additionally, in February 2010 they announced a new two-year $750 million stock buyback. On top of that, they forecast fiscal 2010 capital expenditures of approximately $215 million. Strong cash flow generation, coupled with existing cash on hand provides Ross plenty of flexibility to finance short and long-term growth.

We believe that at today’s valuation Ross Stores represents an excellent choice for the prudent investor seeking an above average total return. With a dividend payout ratio historically below 15% and a forecast earnings growth rate conservatively expected at 15%, there exists a lot of opportunity for dividend increases as well. We rate Ross Stores, Inc. a long-term buy.

Disclosure: Author long ROST

Source: Ross Stores: Value and Growth With Dividend Kicker