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Stock Strategist

Discount Apparel Retailer's Stock Looking Good at These Prices

We think Ross is perfectly positioned to gain market share with its brand-name merchandise at a discount.

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Off-price retailers like  Ross (ROST) have increased their customer bases throughout the recession and weak recovery. This has come largely at the expense of other apparel retailers, with same-store sales in our department store coverage universe falling an average of 5% in 2012 compared with a 6% same-store sales increase for Ross. We think consumers have become more price-oriented and willing to trade customer service and an expensive store design for 20%-60% discounts on the same brand-name merchandise. With economic headwinds likely to persist over the near term, we think Ross will maintain its new market share and benefit from suppliers' excess inventory. That said, we also believe that this model will work in a positive economic environment.

With consumers remaining steadfastly focused on value, Ross reported a strong second quarter, its strength spanning revenue growth, merchandise gross margin, and expense control. Management raised full-year earnings-per-share guidance to a range of $4.18-$4.26 (including a one-time $0.02 benefit) from $4.09-$4.21. We think these results support our view that Ross has a narrow moat, its sustainable competitive advantage stemming from its vendor scale, high inventory turnover, ability to buy into trends, and ability to merchandise stores to meet local preferences. Given ongoing consumer value orientation, we think Ross is perfectly positioned to gain market share with its brand-name merchandise at a discount. We see little change to our $80 fair value estimate, as the results support our expectation for 7% compound annual revenue growth and slight margin expansion over the next five years. We think shares are undervalued and would be buyers of the stock.

Bridget Weishaar does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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