Ross Stores (ROST 1.10%) had a really strong third quarter in 2023. The headline-grabbing number was 5% same-store sales growth. That was very good, but there are some nuances here. And while current shareholders should be pleased by the company's success, investors looking at the stock might want to tread with a bit of caution. Here's why.
Digging into Ross' same-store sales number
Sales at Ross came in at $4.9 billion in the third quarter of 2023, up from $4.6 billion in the prior year. That's a roughly 6.5% increase. There are two key factors that account for that number. The first is new store openings, which lifted the top line but say little about how the existing business is performing. In fact, strong top-line growth driven by new stores can often mask weakening performance at existing stores. That's why investors need to pay attention to same-store sales growth when looking at a retailer like Ross.
Image source: Getty Images.
Same-store sales shows how stores open for a year or so are performing. If this number is negative, it means stores aren't resonating with customers. You want to see positive figures, with higher numbers better than lower ones. That said, anything in the mid-single digits is pretty respectable. Same-store sales growth at Ross was 5% in the third quarter.
The company noted during its earnings call that the driving force of the same-store sales growth was customer traffic. Basically, more people were opting to go to Ross and spend money. That's good news for the retailer, highlighting that it benefits from wealthier customers trading down when finances are tight. While no retailer can avoid the impact of a recession, if there is one in the cards, Ross is likely to be hurt less than full-price retailers. So, all in all, this is good news for shareholders.
Is Ross worth buying today?
The problem is that it might not be worth rushing out to buy this stock today if you don't already own it. For starters, the stock price is already up by around 25% over the past six months. That's a fairly material advance in a very short period of time. It seems likely that Wall Street is already pricing in the good news here.
Then there's the valuation. If you just look at the averages, Ross looks like it could be reasonably priced, if not cheap. For example, the price-to-sales ratio of around 2.26 times is roughly in line with the five-year average P/S ratio of 2.32 times. Round those two numbers to one decimal point and they are the same, suggesting a fair valuation. The price-to-earnings ratio is currently around 25.8 times, which is well below the five-year average of 51.2 times. That suggests the stock is cheap.
ROST PE Ratio data by YCharts
But this is where things get a little more interesting. Look at that gigantic P/E spike in the graph above that took place around the time of the coronavirus pandemic. That pushes the average P/E up materially, making the average a lot less meaningful. If you actually look at the P/E trend on a year-by-year basis, ignoring the extreme high, the current P/E ratio is actually toward the high side. So instead of being fairly priced to cheap, the stock actually looks more like it is fairly priced to expensive.
Ross' success is priced into the stock
To give credit where credit is due, Ross stores' traffic-driven same-store sales growth suggests it is well positioned to weather a weak patch in the retail sector. But it also seems like Wall Street has taken notice of this fact, bidding the stock up materially over the last few months. At this point, investors with a value bias of any sort will probably want to stay on the sidelines.
