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Is Ross Stores No Longer a Buy?

Most US retailers didn't post a strong holiday quarter as severe weather conditions kept hurting their sales, and this included Ross Stores  (NASDAQ: ROST  ) . Does this mean that Ross is no longer a buy? Let's find out what the future holds for the company and explore where it stands in relation to peers Kohl's (NYSE: KSS  ) and Gap (NYSE: GPS  ) .

Fourth-quarter results
In the fourth quarter, Ross earned $1.02 per share compared to last year's earnings per share of $1.07. Revenue was also down by 0.7% year over year to $2.74 billion. Analysts had estimated per-share earnings of $1.01 on revenue of $2.75 billion. Comparable-store sales grew 2% due to an increase in the size of the average transaction. The operating margin fell 12.7% in the quarter, down 95 basis points from the prior year's period.

The company noted that despite a very competitive holiday season, it enjoyed a favorable customer response because of its compelling bargains on various brands. The junior segment of the company's business emerged as the top performer within the merchandise category, while Texas outshone all other regions.

For full-year 2013, Ross Stores' per-share earnings grew nearly 10% to $3.88, up from $3.53 in 2012. Revenue rose more than 5% to $10.2 billion, whereas identical-store sales increased by 3%. 

What is Ross up to?
Earlier, Ross said that it will open 95 stores this year: 75 Ross Dress for Less stores and 20 dd's Discounts stores. The retailer has already opened 30 Ross Dress for Less stores and 7 dd's Discount stores in 14 different states. At a time when many retailers are trying to cut their costs rather than expanding, Ross management's decision to open new outlets is a healthy sign for investors. Ross has also said that it has a long-term goal of operating around 2,000 stores.

Ross has always believed in rewarding its shareholders through share buybacks and growing dividends. In the fourth quarter, it repurchased 1.8 million shares worth $129 million, which brought the total stock-repurchase value during fiscal 2013 to $550 million. The company has a remaining share-repurchase authorization of $550 million. 

Moreover, Ross has once again raised its dividend, just like last year. The company increased its quarterly distribution by 18% to $0.20 per share; previously, it had raised the dividend by 21%.

During the last few days, Ross executives have sold quite a number of shares in the open market, which is a somewhat worrying sign for investors. On March 3, Ross CEO Michael Balmuth sold 150,673 shares at an average price of $71.04. Furthermore, CFO Michael J. Hartshorn sold 2,362 shares on the open market during the same month. Last week, the company's Executive Vice President Lisa R. Panattoni also sold 5,932 shares at an average price of $73.45. 

In the current quarter, Ross anticipates EPS of $1.11-$1.15 with 1% to 2% growth in comparable sales. For fiscal 2014, Ross Stores expects per-share earnings of $4.05 to $4.21; it's forecasting growth of 4% to 9%. The outlook, however, is quite conservative when compared to analysts' average estimate of $4.34.

Industry peers
Kohl's posted weak performance in the latest quarter, as earnings fell 12% to $1.56 per share. Revenue for the quarter dipped 3.8% to $6.1 billion, as the company had an additional week during last year's comparable quarter. Sales were also affected by decreased traffic and lower levels of clearance merchandise. 

In recent times, the company shifted its focus from national brands to a new range of exclusive-brand categories in order to lure more customers to its stores. However, the move failed to bring desired results for the company and prompted it to concentrate once again on its core national brands. 

Despite offering heavy discounts during the holiday season, Gap reported solid results in its most recent quarter. The retailer earned $0.68 per share for the quarter, surpassing Thomson Reuters' projections of $0.66 a share. In the last few quarters, Gap's "Reserve in Store" service has paid off really well. For this reason, the retailer is expanding the service to more cities in the US.

Moreover, China has proved to be a fruitful market for the company. Therefore, the retailer plans to open 30 new stores in China this year. Gap has tamped its earnings guidance for fiscal 2014 due to anticipated headwinds from foreign currencies.  

Final thoughts
Ross Stores posted average results in its latest quarterly report. Earnings beat estimates by a small margin, while revenue merely missed expectations. Ross continues to multiply its store count, which is a healthy sign for the company's growth prospects. Its share-repurchase program along with the latest dividend raise shows its intent to keep rewarding its shareholders. But, a somewhat worrying sign is the company's conservative outlook for this year.

Furthermore, its top executives, especially the CEO, have recently sold a good number of shares; this casts a shadow of doubt over the company's future. Considering all of this, I will remain neutral on Ross Stores at this point in time.

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