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Ross Stores Looks Cheap After A Conservative Guide

Mar. 04, 2020 2:19 PM ETRoss Stores, Inc. (ROST)TJX4 Comments
Detroit Bear profile picture
Detroit Bear


  • Ross Stores posted a great 2019, but provided muted guidance for comps and EPS growth in 2020.
  • Coronavirus is easily my biggest fear, but I think it will be contained faster than the consensus may think.
  • Shares look somewhat cheap, and they are worth $116-122.

Shares of Ross Stores (NASDAQ:ROST) tumbled after hours, falling to $105.70 after opening the day at $111. The company posted Q4 results that were slightly better than anticipated, and, as per their standard practice, guided to muted comp store sales growth of 1-2%, scaring off nervous investors. I realized that I have not written about Ross Stores since 2018, though I have happily held shares in the interim. Let’s take a look at the fundamentals of the business after it reported 2019 results, and why I believe shares are slightly undervalued, worth $116 - $122.

Q4 and 2019 – Solid Performance Consistent with Past Trends

Ross’ Q4 results were relatively consistent with what one would expect from the company. Sales jumped 7.5% y/y to $4.4 billion driven by an impressive 4% comp store growth rate against a 4% growth rate in the year ago period, driving a 2-year stack of 8%. Results were similarly strong for FY19, with total sales up 7% y/y to $16 billion driven by a 3% comp against a 4% comp for 2018. Ross’ model continues to work, with strength specifically in the children’s business as well as the Midwest driving results in Q4.

On the cost side, gross margin for FY19 fell about 30 basis points y/y to 28.1% of sales, driven largely by higher distribution costs as well as tariffs in China. SG&A declined about 10 basis points y/y as the company was able to achieve some comp store growth leverage in spite of a higher wage environment. Ross always manages SG&A costs tremendously well, and it should be little surprise that management contained operating margin erosion to 20 basis points in FY19, with operating margin coming in at 13.4%, with some strength shown in Q4. Management runs the business incredibly tight, and I think the company has successfully mitigated significant wage pressure by

This article was written by

Detroit Bear profile picture
A bear out in the woods.

Analyst’s Disclosure: I am/we are long ROST, TJX. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (4)

Buyandhold 2012 profile picture
Ross Stores recently became a dividend aristocrat, but it's overpriced. So it's a hold.
stunnell85 profile picture
Chart out the past year of earnings releases and you can see that each time, for whatever reason, the stock tanks (except December). This was on the back of continually outperforming results. Then it wavers and comes back stronger. We saw it a little bit here today with it hanging out at 106.50 then ending above 109.50. It is oversold beyond question.
100_long profile picture
Any thought on when we could see $116 ?
Detroit Bear profile picture
I would say this year if there's a Corona resolution in 3-4 months. Otherwise, I would look for 2021.
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