Concerns over high inflation and slowing economic growth have caused the Nasdaq Composite to plummet nearly 30% year to date. This may seem troubling to investors in the near term. But investors with a focus on the long game have a distinct advantage due to this market volatility: the ability to pick up quality stocks at discounted valuations.
Down 36% so far this year, the off-price retailer Ross Stores (ROST -0.59%) has been hit especially hard. But is the stock's plunge a buying opportunity? Or should investors steer clear of Ross Stores? Let's dig into the stock's fundamentals and valuation to decide.
Image source: Getty Images.
A quarter with a high bar to clear
When Ross Stores reported its earnings results for the first quarter on May 19, the company missed both analysts' sales and diluted earnings per share (EPS) expectations.
Ross Stores recorded $4.3 billion in sales during the quarter, which was a 4.1% decline over the year-ago period. For context, this fell moderately short of the analyst sales consensus of $4.5 billion. What prompted the company to miss the average analyst sales estimate for only the third time out of the last 10 quarters?
Ross Stores faced a particularly challenging comparison in the first quarter for a couple of reasons. First, consumers received stimulus checks in the first quarter of 2021 due to the American Rescue Plan Act. Thus, compared to the first quarter of 2021, consumers had less income available for discretionary spending. Second, much higher inflation in the first quarter than the year-prior also ate into discretionary income for consumers.
This explains why the company's comparable-store sales decreased 7% year over year during the first quarter. This was partially offset by a 4.5% increase in Ross Stores' total store count to 1,951 in the first quarter.
The company posted $0.97 in diluted EPS for the first quarter, which was a 27.6% drop over the year-ago period. This missed the analyst diluted EPS consensus of $1.00 during the quarter. What precipitated Ross Stores to come up short of the average analyst diluted EPS forecast for the third quarter out of the past 10 quarters?
The company's lower sales resulted in the net margin moving 270 basis points lower year over year to 7.8% in the first quarter. This was only partly neutralized by a 1.8% decrease in Ross Stores' weighted-average outstanding share count to 348.8 million during the quarter.
The dividend can keep growing
Ross Stores seems positioned to continue increasing its dividend in the years ahead.
This is because the stock's dividend payout ratio is expected to be 27.9% for the current fiscal year. This gives Ross Stores plenty of room to expand its business, repay debt, and repurchase shares to drive diluted EPS higher in the future.
The stock's 1.7% dividend yield is slightly above the S&P 500 index's 1.6% yield. Ross Stores' high-single-digit annual dividend growth potential is the cherry on top that makes it a stock that investors should consider buying for their portfolio.
A sensible valuation for a wonderful stock
The sell-off in Ross Stores appears to have brought it back down to an enticing valuation for long-term investors.
That's because the stock's forward price-to-earnings (P/E) ratio of 16.2 is a bit below the apparel retailer industry average forward P/E ratio of 16.8. And if that wasn't enough to prove the stock is worth a look, Ross Stores' price-to-sales ratio of 1.4 is also well below its 10-year median of 1.9.
