Ross Stores - Great Off-Price Retailer, No Discount On Shares Yet

May.25.14 | About: Ross Stores, (ROST)


Ross Stores manages to report comparable sales growth in a difficult market.

The company has an excellent track record and a rock solid balance sheet.

As I await a slightly better entry point before picking up shares.

Ross Stores (NASDAQ:ROST) released a second quarter earnings report which was largely in line with market expectations on Thursday.

Despite the excellent track record and the strong balance sheet I would like to see a little further correction before picking up shares at this moment in time.

First Quarter Headlines

Ross Stores reported first quarter revenues of $2.68 billion which was up 6% compared to last year, supported by a mere 1% increase in comparable store sales.

Reported net earnings improved to $243.9 million which implies a gain of 4.0% compared to last year. Thanks to fairly sizable share repurchases, earnings per share managed to increase by 7.5% to $1.15 per share on a diluted basis.

Looking Into The Operations

CEO Michael Balmuth was quite pleased with the results as earnings came in at the high end of the company's guidance. Severe weather and a challenging retail environment were tackled by strict inventory as well as expense control.

Like many other retailers, Ross saw sales improve in April thanks to better weather and the later Easter period. Gross margins fell by 35 basis points to 28.8% of sales. This was partially offset by a 10 basis point decline in operating expenses resulting in operating margins of 14.6%.

Solid Outlook

For the current second quarter, Ross Stores anticipates same store sales growth to come in between 1 and 2%. This should translate into earnings of $1.05 to $1.09 per share, which compares to last year's earnings of $0.98 per share.

Full year earnings are now foreseen at $4.09 to $4.21 per share, up from earnings of $3.88 per share reported for last year.

Valuing The Retailer

Ross Stores ended the first quarter with $596 million in cash and equivalents. Total debt stands at $150 million, resulting in a comfortable net cash position of around $450 million.

Of importance during sluggish sales periods, inventories stood at $1.25 billion up just very little compared to last year.

Trading around $68 per share Ross Stores is valued at $14.4 billion, or roughly $14 billion after excluding the net cash balances. Based on projected growth, revenues could come in between $10.5 and $11 billion as earnings are anticipated to come in around $875 million.

This values equity in the retail giant at 1.3 times annual revenues and 16 times anticipated earnings.

The company pays out a current quarterly dividend of $0.20 per share, thereby providing investors with a 1.2% dividend yield.

Dress For Less.. Is More For Shareholders

Ross Stores operates under the ¨Dress For Less¨ concept, being the largest off-price apparel and home fashion retailer within the US. In total the company has 1,302 stores offering quality and brand name apparel, accessories and home goods for a 20 to 60% discount from department and specialty retail prices.

This is a strong segment which has performed well in recent years as many in the middle and lower class are struggling at the moment.

Ross typically targets female shoppers which are looking for a bargain, enjoy the ¨treasure hunt¨ and visit its stores often, according to a recent investor presentation.

Takeaway For Investors

The everlasting effects of the big recession are still being felt today, years after the crisis begun. A challenging macro-economic and even more challenging retail environment were good conditions for Ross to operate in. The company's strengths like inventory management and bargaining power have been a real plus.

While the first quarter results marked a bit of a slowdown which is largely weather related, Ross Stores has an excellent track record. The company operates with a very strong balance sheet and recently began to return cash to investors with growth slowing down. For starters it initiated a dividend with a current yield of 1.2%.

On top of this come share repurchases, totaling $139 million in the first quarter and expected to come in at $550 million this year. At that rate the company will return nearly another 4.0% in cash to its investors.

While all of this sounds great, the share price already reflects a great deal of good news, trading at 16 times forward earnings as shares have more than doubled from levels at the start of 2011. Shares are currently trading at historically high levels which is justified thanks to impressive growth in recent years.

Still I would like to await a further correction, like the general retail sector has witnessed in recent months before picking up shares around the $60 level.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.