Ross Stores: Still a Bargain?

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Off-price retailer Ross Stores (Nasdaq: ROST) has recently attracted bargain-hungry investors. Even though its stock has risen 30% since October, the company may still have some upside left.

Fiscal fourth-quarter revenues, which an included an extra week, spiked 14% to $1.6 billion, though same-store sales inched up only 1%. Keep in mind that during the year-ago period, same-store sales increased 6%.

Ross has spent several years investing in information technology systems to improve its inventory management, forecasting, and labor costs. The company has also focused on reducing markdowns and getting better pricing on distribution. So far, the results are encouraging: The gross profit margin increased 60 basis points, and operating margin improved 1.15 percentage points year over year.

Those margin improvements may sound like rounding errors, but they're significant for a company of Ross' size. The margin improvements helped boost fiscal fourth-quarter net income by 35%, to $0.66 per share.

At 20 times earnings, Ross is in line with the valuations of peers like TJX Companies (NYSE: TJX) and Stein-Mart (Nasdaq: SMRT). The company also increased earnings by 25% in 2006, to $1.70 per share, and raised earnings guidance to between $1.85 and $1.95 per share for fiscal 2007. This may be a conservative estimate, assuming that the company can continue its margin improvements.

With operating cash flows exceeding $506.8 million last year, Ross not only has the capital to build more stores, but also to buy back stock and pay dividends. The company increased its dividend by 25%, and it plans to buy back $200 million in stock in 2007. Foolish investors prize these qualities, and they make Ross a solid pick for any Foolish watch list.

Dress for success in further Foolishness:

• At Ross, a Discount in the Margins
• Ross Stores Fails to Impress
• Ross Stores Ramping Up: Fool by Numbers

Fool contributor Tom Taulli, author of The Complete M&A Handbook, does not own shares mentioned in this article. He is currently ranked 1,590 out of 24,619 in CAPS.