Should You Buy Ross Stores?

Ross Stores (NASDAQ: ROST  ) reported fourth-quarter results that were in-line with its own guidance . Its revenue and earnings declined marginally year-over-year, but this can be explained by the extra week in last year's retail calendar. Ross' dd's Discounts stores also performed very well, with solid gains in sales and operating profit. However, the off-price retailer issued a cautious outlook for 2014 due to macro-economic uncertainty. In addition, Ross faces tough competition from retail giants such as Wal-Mart (NYSE: WMT  ) and other off-price retailers like TJX Companies (NYSE: TJX  ) .

In light of Ross' recent results and the competitive climate, let us take a closer look at its prospects.

Beyond the results
Ross' fourth-quarter revenue declined to $2.74 billion in the previous quarter from $2.76 billion last year. Net profit fell from $236.6 million to $218 million. Leaving the extra week, comp sales rose 2% year-over-year. The company expects sales to grow 1% to 2% in the first quarter of the current fiscal year. 

Looking forward, Ross could turn out to be a good investment due to strength across its different business segments. Its dd's Discounts stores are performing exceptionally well due to their cheap prices, which has driven sales and profits higher. To sustain its growth momentum, Ross plans to increase the number of dd's Discounts stores to 500 over the long run. 

Ross is also planning to repurchase $1.1 billion worth of shares by the end of 2014. It had purchased 8.2 million shares, which were worth $550 million, last year, and it expects to complete the remaining purchases by the end of this year. The move will assist Ross in achieving its long-term EPS growth target of 10%-13%, while it will also return cash to shareholders at the same time. The buyback will also provide a much-needed boost to the company since it is struggling to post solid growth numbers.

Moreover, Ross' outlook for 2014 is also cautious due to the uncertain macroeconomic and retail climate. It is relying heavily on its off-price strategy by maintaining lean inventory levels, which will enable it to provide fresh and exciting merchandise to customers.

Increasing competition
However, Ross Stores, which operates only in the U.S, faces tough competition from retail giant Wal-Mart. Wal-Mart, in a bid to expand market share, has opened smaller stores that have shown remarkable results as their comps increased 5% last year. As a result, Wal-Mart has doubled the number of such stores that it plans to open in 2015. In addition, Wal-Mart is also investing in its online business aggressively. Presently, the e-business of Wal-Mart accounts for only 3% of its revenue. However, Wal-Mart expects to change this scenario over the long run as it hopes to generate more revenue from online sales.

The competition in the industry is further heightened by the presence of other off-price retailers, such as TJX. Recently, TJX's management stated that they are investing in supply chain initiatives which will help the company offer lower-priced and attractive items to customers. TJX times its inventory purchases to circumnavigate the ill-effects of markdowns. TJX is also increasing its store count aggressively, as it plans to grow its footprint to 3,391 stores this year. Over the long run, the company plans to increase its store count by 60% in markets where it is currently active. 

Takeaway
Ross has performed steadily so far and its shares are cheap as well. It currently has a trailing P/E of 18.67 and a forward P/E of 15.45, which indicates expectations for earnings growth. Moreover, its dd's Discounts stores have been doing well and with another 100 new stores in the cards this year, Ross could continue its steady growth going forward.

However, investors need to be careful of Ross' competitors and watch how the company responds to the threats of Wal-Mart, TJX, and other players, as these could hurt its performance going forward.

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Note: A previous version of this article misstated TJX Companies's store count. The Fool regrets the error.


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