Can Ross Keep it Rolling?
Christopher is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It was a good year for Ross Stores (NASDAQ: ROST), the off-priced discounter of apparel and home accessories. It was a great year for stockholders, with the stock shooting up nearly 62 percent from 32.22 to an all-time high of 52.71. The stock price is adjusted for a two-for-one stock split announced in November that paid stockholders of record Dec. 15, 2011 a 100 percent stock dividend. At the same time, executive management announced a quarterly cash dividend of .22 cents per share (.11 cents post-split).
Ross has good fundamentals and strong balance sheet with $833 million in cash. The company has a gross margin of about 27 percent, return on assets of 20.6 percent, and return on equity of 36.05 percent demonstrating efficient and effective management.
The stock’s P/E of 18.89 is a bit above the industry average of 16.30. The company’s competitors have slightly better numbers. Nordstrom (NYSE: JWN) has a P/E of 15.7 and a dividend yield of 1.9 percent, compared to ROST’s .8 percent. The Limited (NYSE: LTD) sports a P/E of 14.04 and a dividend yield of 1.9 percent. Forward P/E for Ross is estimated to be 15.93 and its PEG ratio is 1.6, pretty much aligned with the industry average of 1.56.
Ross delivered a terrific earnings report for December 2011 with same store sales up 9 percent over 2010. This surpassed analyst estimates of 4 percent. Overall, sales totaled $8.125 billion compared with $7.425 billion in sales for the eleven months ended Jan. 1, 2011.
Management has upped earnings guidance for Q4 2011 and boosted expectations overall for 2012.
Looking ahead, CEO Michael Balmuth said, “Based on our sales and favorable gross margin trends for the first two months of the quarter and our continued assumption for a 1% to 2% increase in January same store sales, we now project earnings per share of $.82 to $.83 for the 13 weeks ending Jan. 28. This updated range compares to our prior earnings guidance of $.77 to $.80 per share, and represents a forecasted increase of 19% to 20% over $.69 in last year’s fourth quarter. All current and prior year earnings per share have been adjusted for our recent two-for-one stock split.”
The store’s mission to sell off-price clothing that allows consumers to “dress for less” is an attractive offering. The company has kept costs down to stay competitive with its bargain-priced fashions and accessories. The only red flag present on the company’s last full-year balance sheet issued Jan. 29 was an increase in its inventory number, which accounted for $1.08 billion in assets compared to $872 million in 2010 and $881 million in 2009. As said earlier, it was a very good year for Ross.
The stock is currently trading at around its all-time high and up 62 percent since January 2011 with a Price/Book ratio of 8.18. Ross was a tremendous winner for 2011’s fortunate stockholders. With a run-up like that, it’s not surprising that analysts’ recommendations stand at a lukewarm 2.3 on 1 – 5 scale with 5 being a strong sell.
With its good fundamentals, effective management team and bright future forecasts, Ross is a solid offering, although after such a run, existing stockholders should think about taking some of their profits off the table. At current levels, the stock seems fairly priced and is only attractive to buy on dips and general market pullbacks.
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