Can Ross Stores Continue to Outperform in Retail?

Discounted apparel retailer Ross Stores, Inc. (NASDAQ:ROST) has been outperforming its industry peers for quite some time.

Ross stock gained 70.7% over the past two years, while the SPDR S&P Retail ETF (NYSEARCA:XRT) increased by just 17.3% in the same period.

Ross comes out ahead when compared to other apparel stores like Macy’s, Inc. (NYSE:M) and Nordstrom, Inc. (NYSE:JWN), and it is the clear winner against big box retailers like Walmart Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT). The big question for investors is whether this outperformance will last?

Ross Has An Unexpected Growth Lever

Ross operates in the off-price retail market, which has become an attractive option for value-conscious shoppers who don’t want to sacrifice their favorite fashion and lifestyle brands despite budget constraints. Deep discounts on merchandise ensure shoppers don’t feel they are spending recklessly or conspicuously, and for some customers, the endorphin rush that comes with getting a great deal is particularly enticing. 

For now, the off-price retail segment is concentrated in North America, but most industry analysts believe expansion is inevitable.

Off-price retailers have tremendous opportunity in emerging markets, and growth prospects are virtually unlimited. The global off-price retail market is worth an estimated $342.62 billion right now, and it is expected to grow at a CAGR of 8.5% to reach $606.49 billion by 2031.

Is Ross positioned to benefit from that growth? Bottom line – is Ross stock a buy? 

How Has the Growth Been for Ross Stores?

The macroeconomic backdrop has not been favorable for retail since the start of the decade, and the challenges have been especially difficult for retailers stocking discretionary items like clothing.

In 2020, Ross was forced to close stores and distribution centers temporarily during the height of the health crisis, which put tremendous pressure on financial performance.  

Ross attempted to weather the storm by focusing on liquidity. The strategy was intended to extend its runway and keep operations buoyed but sales for fiscal 2020 (the company’s fiscal years end in January or February of the following year) declined by 21.9% year-over-year to $12.53 billion.

The following year, Ross was able to post a strong recovery. Annual sales for fiscal 2021 came in well over pre-2020 era results, totaling $18.92 billion. Compared to fiscal 2019, Ross Stores’ top line increased by 17.9%.

Industry experts generally agreed that the company would maintain the strong performance demonstrated in 2021, but a variety of economic obstacles made that impossible. Debilitating inflation took hold, depleting the purchasing power of the company’s key customers – those with low to moderate income.

As a result, sales dropped again – this time at a rate of 1.2% from the prior year for a total of $18.70 billion in fiscal 2022.

Ross was able to turn things around in fiscal 2023. Sales rebounded by 9% year-over-year to $20.38 billion, surpassing the company’s own expectations.

Shareholders were gratified to see that despite the volatility of Ross’s top line performance, the company maintained its profitability. Bottom-line growth generally kept pace with top-line growth.

In the most recent fiscal year, Ross Stores’ operating margin expanded to 12.4%, up 165 basis points compared to the prior year. This result reflects strong same-store sales growth and lower freight expenses.

Ross Stores Is Expanding Its Footprint

Ross Stores determined that its Ross brand has consistently outperformed its dd’s DISCOUNTS brand, regardless of economic conditions.

Last year, business leaders focused on analyzing the dd’s DISCOUNTS brand in an effort to identify the root cause of its underperformance. Meanwhile, the decision was made to moderate attempts at growing this segment in newer markets.

In June and July of 2024, Ross Stores opened 24 new locations. These included 21 Ross and three dd’s DISCOUNTS stores across 17 different states.

This is part of a larger business plan that calls for the addition of approximately 90 new stores in the current fiscal year. Roughly 75 of these will be Ross, and the remaining 15 will operate under the dd’s DISCOUNTS brand. 

These new locations took the company’s total operated store count to 2,148, spanning 43 states, the District of Columbia, and Guam. Ross Stores aims to reach at least 2,900 Ross and 700 dd’s DISCOUNTS locations in coming years.

Shareholder Returns Steady For 30 Years

Ross Stores began to pay quarterly dividends in 1994, and its dividend-paying history has been consistent ever since.

Management has declared a quarterly dividend of $0.3675 per share, and that works out to an annual dividend rate of $1.47 per share and a yield of 1.03% at the prevailing share price.

Though the payout ratio is not especially high at 23.15%, the company has a longstanding dividend history. That suggests investors can rely on regular income from Ross stock.

What Should You Do with Ross Stores’ Stock Now?

While Ross’s footprint expansion is exciting, the company’s financials have been somewhat volatile, which may give risk-averse investors pause.

On the other hand, Ross has succeeded in the face of tremendous macroeconomic challenges over the past few years, demonstrating its adaptability and resilience. With the right conditions, there is every reason to believe Ross stock will deliver stable long-term gains.

The company’s price is sitting at 23.63x its forward non-GAAP earnings. While this is higher than the industry average, it is a good value when compared to the company’s own five-year average of 37.06x. A majority of Wall Street analysts recommend buying Ross stock due to the predicted 13.7% upside over the next 12 months.

Is Ross Stores Stock a Good Buy Now?

In spite of a big bullish move over the past two years, Ross Stores stock still appears to be a good buy now with a consensus price target of $171.15 per share according to 21 Wall Street analysts.

If they prove to be right, the upside opportunity for new investors is just shy of 20%. Notably, the stock is trading at a low price-to-earnings ratio relative to near-term growth. The PE ratio is 23x whereas the growth projections for net income are 9.2% annually over the next 5 years.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.