Closeout Retail Or Traditional – Which Is The Better Investment?
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
To be honest, the strength of sales and earnings growth at Ross Stores (NASDAQ: ROST) has been surprising recently. We have a local Ross in my area, and while in the past there have been good deals, the deals are not as consistent as at other retailers. The main reason for this is, Ross tends to stock close-out and overstocked items from other retailers. While the level of available products changes, what has not changed is Ross' capability to turn these closeout deals into huge profits for the company.
If we look at the company's most recent earnings report, you can see the strength in this business very clearly. In this report, the company indicated sales increased 14%, EPS was up 26%, and comparable sales increased 9%. When you consider that one of Ross' primary competitors is the TJX (NYSE: TJX) Marshall's chain, you can see a pattern of upcoming outperformance for Ross. For the remainder of 2012, analysts expect Ross to increase revenues by over 11% and that should lead to earnings growth of over 19% for the full year. While TJX Comp. is expected to grow revenues at about 9%, EPS at this company is expected to increase by 22%. While at first, this would seem to indicate Ross stores is playing at a disadvantage, things begin to change when you look at next year's expectations. Next year, not only is Ross expected to grow revenues at a faster pace, but the company is also expected to outperform when it comes to earnings-per-share growth. Over time, the difference between the two companies gets even larger, as Ross is expected to show at least 13.4% earnings growth versus TJX Comp. is expected to show around 12% growth.
Other positive signs out of Ross' most recent earnings report, were the company's expectations of how many total locations could be potentially opened in the United States. Since the company currently runs 1,146 total stores, and the projections have been increased to at least 2,000 Ross locations and 500 dd's Discounts locations, you can see that the company's size could double, before they would reach these goals. Additionally, the company is being aggressive in repurchasing shares. In the first quarter alone the company repurchased 2 million shares at a total cost of $111 million for an average price of $55.50 per share. Even more impressive is, the company expects to repurchase about $450 million worth of shares for the full year, which would indicate over $300 million in future purchases still to be made. While all of these figures sound like Ross might be the best retail investment in the market, there seems to be one competitor that might be a better choice depending on what investors are looking for.
That competitor is Kohl's (NYSE: KSS). While Kohl's competes as more of a traditional retail store, the company's earnings performance in the future is expected to outperform Ross. In the short-term, analysts are expecting around 8% to 10% earnings per-share growth from Kohl's. However, projecting out five years, most analysts expect Kohl's earnings to grow by more than 14.5%. When you add in the fact that Kohl's dividend yield is about 2.7%, versus Ross' current yield is just 0.8%, you can easily see how investors could potentially choose Kohl's over Ross at this point. The additional benefit that Kohl's offers investors, is the company does not have to rely on overstock items to offer great deals to their customers. In short, if investors are looking for a good play on closeout retail, there might not be a better choice than Ross Stores. However, if investors are looking for a better current yield and better expected long-term earnings growth, it seems that Kohl's is the natural choice. Which one would you choose? Let me know in the comments section below.
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