Ross Stores ($ROST) gains from tax reform and new stores opening

Investment idea by DTI

Exchange: NASDAQ
Sector: Services
Industry: Apparel Stores

Entry strategy

Price: 84–85,5 considering market volatility
Stop-loss: 76,33
Take profit: first target 95,5, then 106,5
Investment horizon: up to 6 months

Company details

Ross Stores, Inc. ($ROST) is an American chain of deeply discounted department stores. It primarily offers apparel, accessories, footwear and home fashions. As of May 5, 2018 the chain comprised 1432 Ross Dress for Less (Ross) stores with discounts up to 20–60% compared to peers and 219 dd’s DISCOUNTS stores with price cuts up to 20–70%.

Ross department store was first opened in 1950. The company began to operate in off-price segment only since 1982, though. For July 4, 2018 the market capitalization of Ross Stores, Inc. comprised $31,84 billion, moreover the $ROST is included S&P 500 index.

Financial summary of Ross Stores performance is presented in Table 1:

Open original — Table 1. Financial overview of Ross Stores, Inc. ($ROST). Source: MarketWatch

Technical analysis (trading plan)

Open original — Pic. 1. Technical analysis for Ross Stores, Inc. ($ROST). Source: TradingView

Fundamental Analysis

The 2018 first quarter report issued on June, 13th says that the diluted EPS grew by 35,37% y/y from $0,82 to $1,11. The result beats the analysts forecast of 29,27%. According to the report, such result has been achieved owing to number of reasons including the Donald Trump’s tax reform.

Due to active stores opening in 2017–2018 (from April 29, 2017 to May 5, 2018 90 stores were opened) the sales of Ross Stores, Inc. increased by 8,5% for the quarter outperforming the firm’s own estimations of 6–7%. The revenue growth for the reporting period increased, compared with the industry as a whole, and surpassed the last five year average (Table 2).

Open original — Table 2. Ross Stores, Inc. ($ROST) revenue growth. Source: Reuters

For the reporting period the profitability of Ross Stores is also above the 5 year company’s average and overwhelms the average value for industry and sector (Table 3 and Table 4).

Open original — Table 3. Ross Stores, Inc. ($ROST) sales ratios. Source: Reuters
Open original — Table 4. Ross Stores, Inc. ($ROST) profitability ratios. Source: Reuters

Financial multiples are relatively high (Table 5). According to vast of them the company costs more than the industry and the sector. That makes sense, as investors keep buying the stocks relying on effective management and active store opening policy.

Open original — Table 5. Ross Stores, Inc. ($ROST) valuation ratios. Source: Reuters

Taking into account relatively high stock price, Ross Stores dividend yield is low compared to peers in the sector. (Table 6) However, the company is increasing the dividends paid to stockholders every year.

Open original — Table 6. Ross Stores, Inc. ($ROST) dividend yield. Source: Reuters

Further growth might be secured by subsequent market expansion. Overall for the 2018FY the company plans to open 100 new stores.

Another driver for the stock price increase is the buyback program. In March the Ross Stores Board of Directors made a decision to extend the stocks buyback by $200 million to $1,075 billion.

The Ross Stores risk factor is the same for all clothing stores, it is the protectionist measures imposed by the US government. A substantial part of products sold in Ross Stores are manufactured outside the USA, thus the import duties increase might extend the costs of the discounter.