Consumers have diverse preferences for just about everything you can imagine: electronics, apparel, and food, to name just a few items. But if there's one thing every consumer can appreciate, it's a bargain.
And with a market capitalization of $30 billion, few apparel retailers reach consumers with bargain-bin prices quite like Ross Stores (ROST 1.17%). But after a challenging second quarter, is the retailer still a buy? Let's go over Ross Stores' fundamentals and valuation to see if it is currently on the sale rack for dividend growth investors.
The comparison period was difficult
Operating 1,669 Ross Dress for Less stores in 40 U.S. states, Washington D.C., and Guam as of the second quarter, Ross Stores is the largest off-price apparel and home fashion chain in the U.S. The company also operated 311 dd's DISCOUNTS in 21 U.S. states with in-season and name brand apparel.
Ross Stores produced $4.6 billion in sales during the second quarter, which was down 4.6% year over year. A sales decline is something shareholders don't want to see from their investments. But it's important to understand that not all sales declines are the same.
The investment thesis that Ross Stores is a top destination for bargain hunters isn't broken -- the company's results in the second quarter were largely due to macroeconomic factors. Economic stimulus that consumers spent in Ross Stores' first and second quarters in 2021 led to a difficult comparison period.
Image Source: Getty Images.
This is because the lack of economic stimulus in the most recent quarter coupled with a higher inflation rate resulted in reduced disposable income and consumer spending.
That's how comparable-store sales were down 7% over the year-ago period during the second quarter. This comparable store sales decline was partially offset by a 4.4% year-over-year increase in Ross Stores' total store count to 1,980, which is why total sales fell less than comparable-store sales for the quarter.
The discount retailer recorded $1.11 in diluted earnings per share (EPS) in the second quarter, which was 20.1% lower than the year-ago period. Higher freight costs caused a 190-basis point decline in the company's net margin to 8.4% during the quarter.
This decline in profitability was partially offset by a 2.5% year-over-year decrease in Ross Stores' diluted outstanding share count to 346.1 million for the quarter.
Flexibility is built into the dividend
Ross Stores' 1.4% dividend yield comes in moderately below the S&P 500 index's 1.7% dividend yield. But this is made up by the safety and growth potential of the company's dividend.
That's because it is forecasted that the dividend payout ratio will come in below 31% for the current fiscal year. This payout ratio provides Ross Stores with enough capital to balance its capital expenditure needs for new store openings with debt reduction and share repurchases.
As a result of macroeconomic headwinds, analysts expect the company's diluted EPS to grow at 3.8% annually through the next five years. Given the low payout ratio, I believe that high-single-digit annual dividend growth will persist over the next few years. That is arguably a nice mix of starting income and future income.
The retailer is a deal for the long haul
Ross Stores' 22% sell-off so far in 2022 has brought the stock down to a reasonably attractive valuation for value investors.
At the current $88 share price, Ross Stores is trading at a trailing-12-month (TTM) price-to-sales (P/S) ratio of 1.7. This is a bit below the 10-year median TTM P/S ratio of 1.9. Considering the company's intact fundamentals, this looks like a deal that bargain stock enthusiasts shouldn't pass up.
