Ross Stores Is a Retail Juggernaut

 | Oct 01, 2013 | 2:00 PM EDT
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As the market climbs, it's getting harder and harder to pick stocks, especially names in the retail apparel industry. But just because it's hard doesn't mean we shouldn't try. After all, Black Friday is a month and half away.

At this point there are two apparel retailers left standing -- TJX (TJX) and Ross Stores (ROST). Back in May, I thought TJX would go higher as the company dialed in to consumer and investors were underestimating the company's earnings power. Since that article, TJX is up 9.5% and still hasn't hit my mid $60s target. I think TJX can work its way higher.

Ross Stores also is hitting all the right notes with consumers. The stock is up 33% year-to-date. ROST is a leader in the off-price apparel business. In just the first six months of 2013, Ross has increased sales 8% to $5.1 billion, with comparable same store sales up 3%. While this is down from the 8% gain last year, it's still positive and should be enough to move the stock higher. Earnings per share increased 18% to $2.06, which was on top of a 26% gain last year.

Ross is still on track to open 33 new stores in the third quarter, which would make a total of 88 for the year. What impresses me the most about Ross Stores is the company's ability to grow operating margin in a tough retail environment. In the first six months of the year, operating margin increased 65 basis points to 14.2%, which was on top of a 90 basis point increase last year. Gross margins jumped 55 basis points, which were driven by higher merchandise margins and slightly lower transportation costs.

For the third quarter ending October, analysts are looking for $2.4 billion in revenue and earnings per share of $0.80. For the year, investors expect sales of $10.3 billion, up 6.25% over last year, gross margins of 28% and earnings of $3.94. Earnings per share would be up 12% over last year through a combination of revenue growth, lower expenses and continued repurchase of stock. The company bought 4.4 million shares and remains on track to spend $550 million on buybacks. In January, the company jacked up the dividend by 21% to $0.17 per share.

With 1,252 stores in 33 states, Ross Stores is a juggernaut. The company has managed to grow in a difficult retail environment and has successfully found a winning formula. If ROST were able to hit investor's financial targets, the company would produce an estimated 44% return on equity. With the shares up 33% year-to-date, the Ross story isn't exactly a secret. In fact, over the last five years, ROST is up 331% easily beating the S&P 500 as well as the better-known TJX.

As I said earlier, same store sales in the first half slowed to 3% from 8% last year this year. While I still like the company, I'm cautious. I'd like to wait for a correction or wait until third quarter results are released before jumping in with both feet. After all, apparel buyers aren't the only ones looking for a bargain.

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