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Ross Stores: Gift That Keeps On Giving

|Includes: Ross Stores, Inc. (ROST)

Since IPO, Ross Stores has generated very attractive returns for investors. It's gone up seven fold since 2009 and now sports a juicy market cap of $27b. Of course, all this is hindsight. But its instructive to note that you could have bought Ross Stores any time since the IPO and done very well. In fact, you can still buy Ross Stores. The returns will almost certainly not be as good going forward. But the run is not over, based at least on the latest numbers.

Here is the company description:

"Ross Stores, Inc. is an off-price retailer of name brand and designer apparel, accessories, footwear, and home fashions for the entire family. The Company and its subsidiaries operate two brands of off-price retail apparel and home fashion stores: Ross Dress for Less (Ross) and dd's DISCOUNTS. Ross is an off-price apparel and home fashion chain in the United States, with approximately 1,274 locations in over 34 states, the District of Columbia and Guam. Ross' target customers are primarily from middle income households. The Company operates approximately 172 dd's DISCOUNTS stores in over 15 states. Both Ross and dd's DISCOUNTS brands target value-conscious women and men between the ages of 18 and 54. The Company owns and operates approximately six distribution processing facilities, including three in California, one in Pennsylvania, and two in South Carolina."

Now let's look at the results for the quarter:

SSS were up a whopping 7% YoY. Revenues grew 15%. Operating margin was up to 12.6%. There's a buy back in place and business is humming. Sales guidance calls for a SSS increase of 1-2% over last year's 4% increase. EPS is projected to be up 11-12% YoY. Not bad.

Ross opened 77 new stores over the last year. Growth continues. From the transcript of the quarterly call.

"As planned, we completed our 2016 store opening program during the third quarter, with the addition of 25 new Ross and nine dd's DISCOUNTS. We expect to end fiscal 2016 with 1,338 Ross and 192 dd's DISCOUNTS, an increase of 84 locations for the year."

Now let's consider Ross' valuation. The market cap is $23b on sales of 12b and the forward P/E is closer to 23. So it isn't cheap. But the valuation is well deserved. Business is humming and there is little evidence that (despite the poor retailing environment) we should sell Ross Stores. Granted returns will not be as good going forward simply because of the larger size, and there's a chance that growth slows and the stock re-rates, but this has been a huge winner and its worth keeping around in the portfolio until there are signs the growth story is over.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.