Company Reports

As the second-largest off-price retailer in the US with about 30% market share, we believe Ross Stores’ unique inventory procurement method and scale positions the firm to comfortably expand its top line at a mid-single-digit pace while fending off competition from online channels in future. We suggest that Ross’ standing as a reliable sales outlet for product manufacturers and traditional (or full-price) retailers looking to discreetly liquidate excess inventory should provide the firm with an abundant assortment of buying opportunities. Ross consistently stocks its more than 2,100 stores with a wide assortment of branded merchandise at bargain prices due to its plentiful vendor relationships and meticulous inventory management.

Wide-moat Ross Stores delivered fiscal 2023 fourth-quarter results that exceeded our expectations as the firm’s assortment of cheap, branded merchandise attracted consumers to its namesake banner. The off-price retailer delivered 7% comparable store sales growth in the quarter (5% for the full year), driven entirely by increased traffic, and its operating margin of 12.4% (up 85 basis points annually, excluding the extra week) easily outpaced our 11.3% forecast. We plan to modestly increase our $109 fair value estimate in light of the firm’s strong results and our favorable view of Ross’ near-term growth prospects, though we still view shares as overvalued.

As the second-largest off-price retailer in the U.S. with about 30% market share, we believe Ross Stores’ unique inventory procurement method and scale positions the firm to comfortably expand its top line at a mid-single-digit pace while fending off competition from online channels in future. We suggest that Ross’ standing as a reliable sales outlet for product manufacturers and traditional (or full-price) retailers looking to discretely liquidate excess inventory should provide the firm with an abundant assortment of buying opportunities. Ross consistently stocks its more than 2,100 stores with a wide assortment of branded merchandise at bargain prices due to its plentiful vendor relationships and meticulous inventory management.

Even amid a challenging retail backdrop, we now award wide moat ratings (from narrow) to leading off-price retailers TJX Companies and Ross Stores as we have confidence each will generate excess returns for 20 years without infringing on one another’s market share. In our view, the firms boast an intangible asset due to global vendor relationships and unique procurement models that are difficult for conventional retailers to replicate. We think the retailers also hold a cost advantage over smaller peers due to their impressive scale.

Narrow-moat Ross Store’s high-value branded merchandise and treasure hunt experience continued to lure shoppers scouring for affordability in its third quarter, driving traffic gains with broad-based strength across all income demographics, similar to narrow-moat TJX’s results. Accordingly, sales improved 8%, supported by 5% comparable sales growth that outpaced our 3% assumption. Further, gross margin expanded by 235 basis points to 27.6%, ahead of our 26% estimate thanks to lower ocean freight costs. The benefit contributed to a 135-basis-point improvement in operating margin (to 11.2%), despite higher wage costs. Given the stout results, management nudged its fiscal 2023 EPS guidance to $5.30-$5.36 from $5.15-$5.26, and we anticipate moving our $5.19 estimate within that range. As such, we plan to raise our $107 fair value estimate by a low-single-digit percentage, leaving shares overvalued after a mid-single-digit pop after results

With a fast-turning inventory of high-value branded merchandise, Ross' store experience and value proposition should continue to resonate independent of economic conditions. Ross should benefit from a turbulent economic environment, as consumers refocus on value and as vendors grapple with oversupply amid fast-changing demand, and we forecast 3% same-store sales growth in 2023. Off-price retailers have not been derailed by past recessions; Ross’ comparable sales grew by 2% and 6% in fiscal 2008 and 2009, respectively.

Like its peer TJX, narrow-moat Ross Stores put up a strong second-quarter performance despite the inflationary environment increasingly holding lower-income consumers hostage. In the period, sales rose 8%, bolstered by 5% same-store sales growth that handily outperformed our flat forecast. Moreover, due to lower-than-expected expenses, Ross was able to hold its operating margin flat year-over-year at 11.3%. Like narrow-moat TJX, lower freight costs allowed for gross-margin expansion for Ross; it achieved a 27.7% rate, around 190 basis points better than last year. It is apparent to us that the value proposition that Ross offers is attracting strong customer traffic, a key support for its sales growth. Further, this momentum is set to continue into the third quarter: Ross offered a forecast for 2%-3% same-store sales growth, a 10.3%-10.6% operating margin (implying 60 basis points of expansion), and $1.16-$1.21 in EPS (20% increase). As such, we plan to lift our second-half outlook towards the firm’s updated range, which will lead us to roughly $5.20 in fiscal 2023 earnings, squarely in the $5.15-$5.26 range that Ross now anticipates.

With a fast-turning inventory of high-value branded merchandise, Ross' store experience and value proposition should continue to resonate independent of economic conditions. Ross should benefit from a turbulent economic environment, as consumers refocus on value and as vendors grapple with oversupply amid fast-changing demand. Off-price retailers have not been derailed by past recessions; Ross’ comparable sales grew by 2% and 6% in fiscal 2008 and 2009, respectively.

With a fast-turning inventory of high-value branded merchandise, Ross' store experience and value proposition should continue to resonate in a variety of economic conditions. Ross should benefit from a turbulent economic environment, as consumers refocus on value and as vendors grapple with oversupply amid fast-changing demand. Off-price retailers have not been derailed by past recessions; Ross’ comparable sales grew by 2% and 6% in fiscal 2008 and 2009, respectively.

Our $103 per share valuation of narrow-moat Ross should not change much after it announced first-quarter results that met our expectations. With the company’s flexibility and value orientation resonating as expected with consumers, we see little reason to change our long-term targets (mid-single-digit top line growth rates against low-double-digit operating margins). With the shares trading near our valuation, we suggest prospective investors seek a larger margin of safety before building a position.

With a fast-turning inventory of high-value branded merchandise, Ross' store experience and value proposition should continue to resonate in a variety of economic conditions. Ross should benefit from a turbulent economic environment, as consumers refocus on value and as vendors grapple with oversupply amid fast-changing demand. Off-price retailers have not been derailed by past recessions; Ross’ comparable sales grew by 2% and 6% in fiscal 2008 and 2009, respectively.

We don’t expect to materially alter our $105 per share fair value estimate for narrow-moat Ross Stores after incorporating fourth-quarter results that modestly edged our forecast and a more tepid 2023 company outlook. In the fourth quarter, Ross delivered sales of $5.2 billion and EPS of $1.31, representing 3% and 26% growth, respectively. Sales were supported by a return to positive same-store sales growth (1%) and profits benefited from lower logistics and compensation costs in the period, which led to 90 basis points of operating margin expansion (10.7%). As consumers continue to shift away from goods to services, same-store sales have taken time to stabilize, as indicated by positive fourth-quarter comps, but full-year comps still contracted 4%.

With a fast-turning inventory of high-value branded merchandise, Ross' store experience and value proposition should continue to resonate in a variety of economic conditions. Ross should benefit from a turbulent economic environment as consumers refocus on value and as vendors grapple with oversupply amid fast-changing demand. Off-price retailers have not been derailed by past recessions; Ross’ comparable sales grew 2% and 6% in fiscal 2008 and 2009, respectively.

Our $97 per share valuation of narrow-moat Ross should rise by a high-single-digit percentage, not far from the trading price’s reaction after the firm reported third-quarter earnings. The period was strong (with comparable sales down 3%, much better than our 8% estimated decline) and our near-term forecasts should rise, but our 10-year average targets still assume mid-single-digit top-line growth rates against low-double-digit operating margins, as we already had a favorable view of the chain’s long-term prospects. We suggest investors await a more attractive entry point.

With a fast-turning inventory of high-value branded merchandise, Ross' store experience and value proposition should continue to resonate as the pandemic ebbs. Ross weathered a number of challenges in 2021, with a difficult environment for experience-oriented physical retail, inflation, supply chain disruptions, and volatile case counts eased by economic stimulus, continued strength in home decor categories, and the start of Americans’ post-pandemic wardrobe rebuild. The current situation is unprecedented, but off-price retailers have not been derailed by past recessions; Ross’ comparable sales grew by 2% and 6% in fiscal 2008 and 2009, respectively.

We plan to reduce our $99 per share valuation of narrow-moat Ross by a low- to mid-single-digit percentage after it reported mixed second-quarter earnings. We believe the challenges the firm faces (unfavorable cost environment, volatile demand dynamics as customers retrench amid inflation) should be confined to the near term, with our long-term targets still assuming mid-single-digit top-line growth rates against low-double-digit operating margins. We suggest prospective investors await a greater margin of safety.

Although the pandemic and inflation have clouded recent earnings, we believe Ross and Burlington (both narrow-moat-rated firms) offer upside. Ross has a long history of strength in myriad economic conditions, and we believe Burlington’s turnaround should narrow the gap between its profitability and that of its large peers.

With a fast-turning inventory of high-value branded merchandise, Ross' store experience and value proposition should continue to resonate as the pandemic ebbs. Ross weathered a number of challenges in 2021, with a difficult environment for experience-oriented physical retail, inflation, supply chain disruptions, and volatile case counts eased by economic stimulus, continued strength in home décor categories, and the start of Americans’ post-pandemic wardrobe rebuild. The current situation is unprecedented, but off-price retailers have not been derailed by past recessions; Ross’ comparable sales grew by 2% and 6% in fiscal 2008 and 2009, respectively.

With a fast-turning inventory of high-value branded merchandise, Ross' store experience and value proposition should continue to resonate as the pandemic ebbs. Ross weathered a number of challenges in 2021, with a difficult environment for experience-oriented physical retail, inflation, supply chain disruptions, and volatile case counts eased by economic stimulus, continued strength in home décor categories, and the start of Americans’ post-pandemic wardrobe rebuild. The current situation is unprecedented, but off-price retailers have not been derailed by past recessions; Ross’ comparable sales grew by 2% and 6% in fiscal 2008 and 2009, respectively.

While we were unimpressed by narrow-moat Ross’s first-quarter earnings, we only plan to reduce our $108 per share valuation by a high-single-digit percentage, a more measured response than the shares’ 20% plunge in after-hours trading. Although we had higher hopes for its sales (7% comparable sales decline versus our expected 2% slide) and operating margin (roughly 10.3%, adjusted to exclude a temporary expense timing benefit, versus our 10.5% target), we believe the chain’s advantages are intact and that it should be able to capitalize on its value orientation. Furthermore, we do not see evidence that the firm’s value proposition to customers (treasure-hunt shopping experience featuring steep discounts on branded merchandise) or vendors (discreet sale of excess merchandise with flexible terms) has changed, so our long-term expectations still include mid-single-digit percentage top-line growth and low-double-digit operating margins over the next decade. We believe the current trading reaction is myopic, ignoring Ross’s long-term strengths, suggesting a buying opportunity.