Chasing Value: Ross Stores Discounting More Than Fashion

Posted Jan 27th 2010 3:20PM by Sheldon Liber
Filed under: Management, Wal-Mart (WMT), Sears Holdings (SHLD), Wells Fargo (WFC), Chasing Value™, Stocks to Buy, AOL (AOL)

If I was making my 2010 picks list today, I might have found a spot for Ross Stores (ROST), the holding company for Ross Dress for Less. Analysts have a hold or market perform rating on the stock, but that is meaningless to me. What does have meaning is 20% sales growth in a dismal year, contributing to a PEG ratio of .75 and an under market P/E of 12.66 (averaging trailing and future figures).

These are very good numbers, however, in reviewing some of the data points with Raphael P., a helpful broker in the Pleasant Hill, CA Wells Fargo (WFC) office, I was reminded that different financial sites have varying numbers. They usually vary by small fractions, as did the Wells data compared to the Aol (AOL) Money and Finance site, so I would encourage investors to check multiple sources.

Back to the case at hand: Ross is the #2 off-price apparel retailer (TJX Cos(TJX) parent of TJ Maxx and Marshalls is #1) with over 950 Ross Dress for Less and dd's DISCOUNTS stores. It sells primarily closeout merchandise, including men's, women's, and children's clothing, undercutting prices of department and specialty stores. Apparel accounts for more than 50% of sales, but they also sell small furnishings, toys and games, luggage, and gourmet foods in select stores. Ross stores are located in strip malls in 27 states, mostly in the western US, and Guam.

I think this discount chain has room to grow comfortably for the next decade, given the state of the economy and the burden of the national debt. For comparison Sears/K-Mart (SHLD) has 3900 stores and Wal-Mart (WMT) has 7900 stores. The formula is in place and management has proven they can execute a plan -- evidence the ROE of 31.34, ROA of 15.40,and ROIC of 27.42.

While the nation has serious debt problems, both public and private, Ross has little long term debt. It is only a matter of time before the other 23 states are added to the Ross map. Specifically, Ross is planning 4% to 5% expansion in 2010 and 7% in 2011. Existing stores reported 6% sales growth.

Ross is currently paying a 1% dividend yield and I do not see why that would not increase as the company continues to expand both top and bottom line margins.

The stock closed yesterday at $45.20 and is up today. It is still trading below its 52 week high of $50.50. This is a stock that is worth holding so there is no need to jump in all at once. It is a perfect candidate for dollar cost averaging into over the next few months.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture and planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I own WFC stock and ROST options.