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Rating:
Rating Since: 10/11/2007
Prior Rating:
HOLD
Grade

77.3

Top-Down

SectorNEUTRAL
IndustryNEUTRAL
SentimentNEUTRAL
FundamentalBUY
07/22/2014

$62.60

Dividend Yield
1.13%
52 Wk High
$81.64
Market Cap
13,245.80
52 Wk Low
$62.15
Short Interest
Next Report
08/21/2014

Market Growth LT B-
Market Growth ST B
EPS Growth A+
Growth Potential D
Earnings Impact B-
Earnings Surprise B-

Mixed Growth Record Based on Company's Recent Reports Suggest Investors Use Caution in Buying the Stock
Ross Stores,'s latest financial report wasn't very encouraging from a revenue growth perspective, extending an anemic growth record also evident from a long term view. The company's total revenue last quarter was $2.68 billion, only 5.54% higher than the year earlier period's revenue of $2.54 billion. In the 12 months ended also last quarter, Ross Stores,'s total sales were $10.37 billion, a 29.54% rise from the $8.01 billion in revenue booked in the equivalent period ended three years ago, a poor showing over such a long period of time. As such, any boost to the company's bottom line will have to come from cutting costs, suggesting it will be important for investors to watch closely the company's margins in the next couple of quarters. In its latest report it also posted very poor year-to-year growth while maintaining, at least for now, a healthy long term profit growth record. This is based on full year profits (rolling four quarters) compared to those of three years ago. It posted a Second quarter profit increase of 3.96% to $243.91 million from $234.61 million (excluding extraordinary items) a year earlier, compared to a 44.61% full year profit increase to $846.60 million in the 12 months ended last quarter from $585.42 million three years earlier. The company's margins fell during the latest quarter with an average 0.61% decline in EBITDA, operating and net margins from a year earlier, reversing an increase reported in the preceding quarter.
     Second quarter earnings per share of $1.15, reported by the company on May 23, 2014, were in line with what analysts had been expecting. The stock had a modest 1.10% gain from the day before to the day after the announcement. It has now exceeded the consensus earnings estimate by an average of 1.21% in its last six reported quarters, a favorable indicator for the stock.

 

Capital Structure A
P/E Analysis A-
Price/Book Ratio A-
Price/Cash Flow Ratio A-
Price/Sales Ratio B-
Market Value A-

Company's Shares Are Attractively Priced Considering the Strength of its Overall Fundamentals
Ross Stores,'s stock, currently priced at 14.43 times 12-month forward earnings per share, trades at a 34.22% discount to our "optimum" P/E ratio of 21.94. This is calculated by MarketGrader based on the company's EPS growth rate in the last two years, using reported quarterly figures. By this measure, Ross Stores,'s earnings per share have increased at an annualized rate of 13.80% in the last two years. The current strength in the company's financial performance, evidenced by a high overall Profitability grade and such a strong EPS growth rate, is not sustainable unless the recent margin contraction is reversed. Otherwise the stock price may feel downward pressure as earnings growth begins to decelerate. The stock also trades at 14.43 times forward earnings estimates for the next four quarters, lower than its trailing P/E and the S&P 500 index's forward P/E of 15.20. By placing a lower multiple on the company's future earnings than it does on the market as a whole, investors may see the company as financially strong but with relatively poor growth prospects. This may offer a valuable opportunity for patient investors willing to wait for future earnings reports.
     Ross Stores,'s market value is currently 6.38 times its total book value, a fair valuation when you consider none of the company's total stockholders' equity is made up of intangible assets such as goodwill. While recording some intangible assets is not necessarily a bad thing, a low percentage of intangibles versus other assets suggests the company's accounting is conservative. Relative to the $5.55 in cash flow per share generated by the company in the last twelve months, the stock is attractively priced at 11.28 times cash flow per share considering its strengths across our fundamental indicators. Its price to sales ratio of 1.28 is slightly higher than the Apparel/Footwear Retail's average of 0.95, both based on trailing 12-month sales. Finally, from a value perspective, we look at how much bigger the company's market capitalization is than its latest operating profits after subtracting taxes. According to this indicator Ross Stores,'s $13.25 billion valuation is reasonable at 12.49 times its most recent quarterly net income plus depreciation.

 

Asset Utilization A+
Capital Utilization B+
Operating Margins B
Relative Margins A+
Return on Equity A+
Quality of Revenues A+

Profitability Record Is Excellent Across the Board Suggesting a Very Well Managed Operation
Ross Stores, is a very profitable company, with an operating margin that exceeds its industry average and an excellent return on shareholder equity, an important part of our analysis. During the last 12 months it booked as net profits 8.16% of its total sales, or $846.60 million, an acceptable net profit margin. The average operating margin for the Apparel/Footwear Retail industry was 8.97% during the same period, 36.92% below the company's 13.08%. Based on how much it has earned in the last four quarters, the return on Ross Stores,'s common equity has been a remarkable 40.80% during this time, even though this is below the 43.34% return on equity achieved in the year-earlier period. This metric plays an important role in how our system measures a company's management efficiency.
     Despite this moderate downturn the company's leverage is low enough that it could be increased without overburdening the company in order to ensure that current profitanility is sustained. Its total debt is only 0.07 times total equity while long term debt makes up 6.74% of total capital. Ross Stores,'s core earnings in the last twelve months grew moderately from the twelve months ended a year earlier. The company's EBITDA for the most recent period was $1.57 billion, or 4.59% above the $1.50 billion earned from its core operations in the prior period. EBITDA is used by MarketGrader to measure the company's true earnings power since it includes interest expenses, income taxes, depreciation and amortization, all non-operating expenses, which are nevertheless accounted for in other parts of our analysis that look at EPS gains and net income.

 

Cash Flow Growth A+
EBIDTA Margin B-
Debt/Cash Flow Ratio A+
Interest Cov. Capacity A+
Economic Value A+
Retention Rate A+

Company's Cash Flow Is Very Well Managed as Our Analysis Reflects a Very Healthy Operation
Ross Stores, reported a 43.00% growth in cash flow during the latest quarter to $504.58 million, an impressive increase from the $352.86 million in the same period last year. This growth seems to be accelerating considering that in the last twelve months the company's cash flow was 13.38% higher than the twelve months ended a year ago, a nice increase but quite lower than the current pace. This upward trend should boost its margins and overall profitability in the next few quarters. Even though the company has $150.00 million in total debt, its net debt is virtually zero since it has $618.70 million in cash on hand; and since it generated $449.18 million in earnings before interest, taxes, depreciation and amortization last quarter, it's safe to say its liquidity is remarkable. Therefore the company's debt is not only very manageable with its own cash flow but could be increased if it wanted to pursue strategic growth opportunities. The company also has the ability to enhance shareholder returns through dividends or by repurchasing its own shares, boosting the future value of its earnings. While the total amount of cash and equivalents on its balance sheet is 16.25% lower than 12 months ago when it was $738.71 million, during the same period the company's leverage also fell with total debt now representing 6.74% of total capital compared to 7.41% last year.
     An important indicator of management efficiency used by MarketGrader is Economic Value Added, or EVA, which measures each company's true return to shareholders after accounting not only for the cost of running the business (operating costs) but also the cost of the capital it employs. By measuring the real cost of capital, both equity and debt, EVA measures the creation of true economic profit. In this case Ross Stores, had $2.23 billion in invested capital in its most recent quarter, a combination of both equity and long term debt. However, the company's weighted cost of equity of 6.77% is much larger than the weighted cost of debt, which is 0.00%. When combined, the two result in a total cost of capital of 6.77%, quite low compared to the company's total return on invested capital of 60.96% based on 12-month trailing operating income. The result is an excellent economic value added of 54.20%, a very high return to investors after all capital costs are covered. The company increased its quarterly common dividend on July 31, 2013 by 17.65%, to 20.00 cents a share from 17.00 cents. It has now distributed dividends uninterrupted for at least five years and based on this latest payout the stock is currently yielding 1.13%. Ross Stores, paid out $153.02 million in common dividends during the 12 months ended last quarter, accounting for 13.04% of cash flow and 18.08% of total earnings after taxes. This relatively modest payout is slightly higher than the 17.67% of total earnings is paid out in the 12 months ended a quarter earlier. Assuming it maintains its generally positive fundamentals, the company has ample flexibility to increase its payout by a bigger margin in the future should it wish to do so.

 

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