Believe It or Not, Ross Stores Is One of the Best in Retail

After Ross Stores  (NASDAQ: ROST  )  released its quarterly results for the period ending May 3, 2014, shares of the discount-specialty retailer barely showed any reaction. The results were decent enough in the current retail environment as its sales and earnings were up over the same period last year.

To long-term shareholders in Ross, which owns the brands "Ross Dress for Less" and "dd's Discounts," it may seem that Wall Street has lost its fascination with the company. Analysts should, however, know better. Ross represents the pinnacle of retail, and investors should give the company credit for what it has been able to accomplish.

First quarter and guidance
For its first quarter of the current fiscal year ending May 3, 2014, sales increased a solid 6% to $2.681 billion from $2.45 billion. In addition, net income also grew by 7% to $243.9 million from $234.6 million in the first quarter a year ago. The results for the company, which essentially tries to sell designer apparel, footwear, and accessories at discounted department store and retail prices, were in-line with expectations.

This, in turn, led the company to project earnings per share for the full year of $4.09 to $4.21, which compares nicely with last year's earnings per share of $3.88. However, these solid but modest gains hide what makes Ross such a great company.

Possibly the most profitable retailer
Like any other company, the true test of a business and how profitable it truly is comes down to how much money it earns on the money invested in the business expressed as a percentage -- also known as return on equity. Looking at the historic returns on equity of Ross in comparison with those of other major retailers tells an interesting story.

Return on equity:

Company Name

2011

2012

2013

Macy's

20.9%

23.3%

24.6%

J.C. Penney Co.

3.8%

   

Ross Stores

44%

44.5%

41.7%

TJX Companies

48%

52%

48.6%

It's not hard to see that Ross and fellow fashion discount store chain The TJX Companies (NYSE: TJX  ) are giving other retailers runs for their money. Struggling department-store retailer J.C. Penney can only dream of being as profitable on a return on equity basis as department store retailer Macy's is, let alone Ross and TJX. As successful as it has been in recent years with growing its net sales year after year, Macy's just can't keep up with Ross and TJX's impressive returns on equity.

Foolish takeaway
Investors shouldn't be dismayed by the solid but unexciting first quarter of Ross. Over the long term, it has proven its ability to generate above-average returns on equity for its shareholders and it, along with its peer TJX, are worth considering for future investment. Ross trades at approximately 17 times this year's expected earnings and TJX trades at approximately 18 times this year's current estimated earnings, which makes both worthy of closer looks by Foolish investors who are interested in owning retailers with proven records of strong profitability.

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