Marcial: Ross Stores: A Retailing Standout?

Consumer spending has slowed and joblessness keeps rising, albeit at a slower pace from a year ago. So it isn't surprising that retailers have struggled to eke out profits—or just break even—in the past two years.

But some industry players have managed to thrive amid the gloom. Among them is the second-largest off-price retailer in the U.S., Ross Stores (ROST), which has 904 stores in 27 states. The company's sales are expected to jump to $7.5 billion in fiscal 2010, ending on Jan. 31, from $6.9 billion in fiscal 2009, according to independent investment research firm Value Line (VALU). And its stock has had a stunning advance, leaping to 47 a share from a 52-week low of 21.70 on Nov. 21, 2008.

Ross Stores is "gaining market share from department stores at a time when consumers are growing increasingly cost-conscious," says Jason N. Asaeda, retailing analyst at Standard & Poor's (MHP). The retailer offers customers "compelling values" on family apparel and home goods, he adds.

Rating the stock a buy, Asaeda says Ross's planned expansion—mainly in its top-performing markets, such as California, Florida, and Texas—as well as management's continuing efforts to boost profitability "[bode] well for company fundamentals."

With the ranks of the unemployed continuing to rise, the company's retailing concept of catering to consumers in the fast-growing, lower-income demographic has become even more relevant and effective now, analysts argue. Its strategy makes Ross Stores, says Asaeda, "an attractive long-term growth investment vehicle."

holiday sales could outpace rivals' With the Thanksgiving and Christmas holidays expected to be a big challenge for retailers, the company may in fact benefit from the holidays this time around, according to some pros. Retailers are expected to spend less on promotions this holiday season, and Ross could benefit "as department stores and specialty retailers have lighter inventories and [plan] much less markdown activity this year," says Laura Champine, analyst at investment firm Cowen (COWN). Those conditions could drive more traffic to Ross Stores as holiday shoppers continue to look for compelling bargains, says Champine, who rates the stock outperform.

The economic recovery is another positive for Ross Stores, because shoppers aren't expected to switch from bargain shopping to buying higher-priced goods. And the company's core customers usually spend more and increase the size of their transactions during improved economic times, analysts say.

So Champine on Oct. 6 revised her estimates for the retailer's sales and earnings, raising them above the Street's consensus estimates. For fiscal 2009 she expects earnings of $3.13 a share, vs. the consensus forecast of $3.10, on sales of $7 billion, and $3.52 for fiscal 2010 on sales of $7.4 billion. For fiscal 2011 she expects the company to earn $4.15 a share on sales of $8 billion.

With the stock going gangbusters, soaring 60% this year, there are some investors who worry it has come too far. Not to worry, say some analysts, who point out that the stock's upside momentum appears intact.

With its solid fundamentals and "reasonable valuation of only 14 times our 2010 earnings estimate of $3.35 a share," the shares should continue to rise, says Patrick McKeever, discount retailing analyst at MKM Partners, who rates the stock a buy, with a 12-month target of 53, or 16 times his 2010 forecast.

McKeever believes his price target is "conservative," given the likelihood of further upward earnings revisions. He calls his target price-to-earnings ratio of 16 in line with the stock's historical average; its average annual price-earnings ratio hit a high of 22.5 in 2004.

Ross Stores, which primarily offers quality in-season brand and designer apparel, accessories, footwear, and home goods and furnishings, "holds our highest ranking for timeliness," says Jerry W. Gray Jr., retail analyst at Value Line. He also ranks the stock highly on safety and technical merits.

"The solid fundamentals of the off-price retail industry, combined with Ross's solid, predictable earnings growth, make the shares a compelling investment regardless of time horizon," says Gray.

If these pros are right, the stock of Ross Stores is a prime candidate for a further markup on Wall Street in the coming months.

Unless otherwise noted, neither the sources cited in Gene Marcial's Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

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