Ross Stores, Inc. Overview and Analysis

Piggybacking on the previous post revolving around public company evaluation, I thought it would be appropriate to go through a real life example. While sentiment surrounding the brick-and-mortar retail industry is bleak, Ross Stores, Inc. (ROST) is a company that checks pretty much every box I look for when searching for upper-echelon entities.

Ross Stores, Inc. is a discounted retail apparel and home fashion store that conducts business through its two brands, Ross Dress for Less and dd’s Discounts. According to the most recent Form 10-K filing, ROST operates over 1,500 physical stores in 36 states. Ross caters to value-conscious consumers and leverages their vast network of vendors to offer a wide-range of name brand merchandise at a significant discount. Below is a depiction of Ross Stores’ product category breakout.

Sales and Earnings Per Share

As illustrated below, Ross Stores increased annual revenues year-over-year dating back to 2007, which is an impressive feat for a relatively mature company. Sales is the engine that ultimately drives a firm’s success and Ross has managed to double their gross receipts during the past 10 years.

(Source: Morningstar, Inc.)

Couple that with consistent earnings per share growth over the same period, and this off-brand retailer has my undivided attention.

(Source: Morningstar, Inc.)

Dividends and Share Repurchases

The California-based department store chain has increased their annual dividend payment for 21 years in a row, which signifies financial stability and shareholder value. Although the stock currently yields a modest 1.2%, Ross has plenty of room for future dividend growth considering the payout ratio is less than 20%. In the event of a potential downturn, in which sales and/or earnings could stagnate, Ross has a generous cushion to cover their existing payment.

(Source: Morningstar, Inc.)

Furthermore, Ross Stores has repurchased more than one-fourth of their shares outstanding over the past ten years. While share buybacks are not always viewed in the same light as dividend payments, they can be an effective way to unlock value for stockholders if shares are retired at a reasonable valuation. ROST is in the midst of a two-year, $1.75 billion stock repurchase program enacted through FY 2018.

Return on Equity

Return on equity (ROE) is arguably the most important efficiency metric used by analysts to evaluate public enterprises. Generally speaking, conventional wisdom suggests an ROE above 15%-20% to be favorable. As shown below, Ross has delivered sufficient and stable returns on equity over time, which aligns with the previous exhibits to paint the picture of responsible management and effective resource allocation.

(Source: Morningstar, Inc.)

Shareholder Performance

From a capital appreciation standpoint, Ross Stores outperformed their industry benchmark, as well as the overall market, dating back to the beginning of 2011.

(Source: Ross Stores, Inc. 2016 10-k)

While past performance is not necessarily an indicator of future success, management deserves the benefit of the doubt in terms of value creation and capital administration.

Future Outlook

In terms of growth prospects, Ross Stores has yet to develop their footprint outside of the United States and an international expansion could potentially serve as a future organic growth driver. Additionally, ROST does not have an e-commerce operation, which could be another avenue to advance the prospects of their business. Although the emergence of an online retail platform will likely cannibalize some existing business, the initiative will help diversify revenue sources and tap into the rapidly growing e-commerce sphere.

The primary long-term concern with Ross relates to the shifting landscape of retail from brick-and-mortar to an internet-based marketplace. When evaluating any type of retailer these days, it is almost a requirement to assess future risks in relation to the Boogeyman, formally known as Amazon.

While the retail sector seems to have a black cloud looming over it, ROST appears to be safe from the clutches of Amazon for now. Furthermore, as weaker companies such as Sears and K-Mart teeter on the brink of bankruptcy, the primary players in the space have an opportunity to gobble up increased market share. Although the proverbial big-box retail pie will consequently shrink, there will be less companies sitting at the table.

Conclusion

Despite being an established company, Ross Stores has demonstrated the ability to consistently grow sales and earnings organically. To the delight of stockholders, Ross has retired shares at a rapid clip and raised their annual dividend payment year-over-year for more than two decades. While there are other factors to consider, such as valuation and macro concerns surrounding brick-and-mortar retailers, Ross Stores is an enterprise that I will certainly keep a close eye on.

Full disclosure: I do not own shares of ROST as of this writing.