Ross Stores' (NASDAQ:ROST) results just keep chugging along. The discount retailer offers quality merchandise at a discount. This concept promises never to go out of style. The stock does not offer investors the same discount, but they would be wise to contemplate purchasing shares. It offers better growth prospects than competitor TJX Companies (NYSE:TJX). Meanwhile, Kohl's (NYSE:KSS) earnings have been down this year, yet its stock price is up, which is not a great formula.

The off-price retailer does a nice job of separating into two distinct, but easily understood brands. Ross Dress for Less offers name brand and designer apparel, accessories, footwear, and home fashions at 20% to 60% discounts to department and specialty store prices. This segment targets middle income households.

Its dd's DISCOUNTS offers more moderately priced goods in the same categories. The prices are 20% to 70% off where it is regularly sold at moderate department and discount stores.

Results pleasing to the eye
It is a simple concept, but management is executing it very well. The bottom line has been growing in double digits. For the first nine months of the year, diluted earnings per share grew better than 16%, to $2.86, on top of the 22% increase in the prior year. Thanks to share buybacks, this is better than the gains in net income. The bottom line increased 12.6%, to $619.4 million.

Top line growth was an impressive 8% so far this year, to almost $7.5 billion. Comparable store sales were up 3%, but it was facing a difficult 7% comparison from last year.

Improving gross margins helped fuel the bottom line growth. It reached 28.3%, from 27.9%.

Management's guidance for the fourth quarter, which ends February 1, is cautious, reflecting a competitive pricing environment. The company expects comparable sales to increase 1% to 2%, versus a 5% comp a year ago. However, it is projecting earnings of $0.97 to $1.01 a share. Although the company earned $1.07 in the year ago period, there was an extra week, which added $0.10, according to management's estimate. All told, the fourth quarter's share net figure will essentially be flat if the performance goes as the company expects.

The stock price pulled back from above $80 to the mid-$70 range after the outlook was given in November. Nonetheless, this would appear to represent a buying opportunity. The company's history of solid operating performance would suggest this is merely a hiccup. In 2008, gross margins were 23.6%, and reached 27.9% at the end of 2012. The pre-tax earnings margin rose to 13% from 7.6%.

Ross has been successful by consistently being able to purchase quality merchandise at attractive prices so it can offer discounts to its customers. The company purchases inventory directly from the manufacturers, utilizing almost 8,000 vendors, which allows access to a lot of goods. It takes excess merchandise, including cancelled orders from retailers and manufacturing overruns. Ross also uses economies of scale to keep operating costs low, and can take a large order of excess inventory.


Happy returns
Shareholders should be very happy with Ross Stores' commitment to returning cash. Since 2008, dividends increased from a yearly payout of about $0.20 a share to the current $0.68. The company is also using its excess cash flow to repurchase shares. For the first nine months of this fiscal year, it spent $421 million. This reduced the diluted share count by nearly 3%.

Meanwhile, Ross is not sacrificing its balance sheet to carry out these actions. Total debt remained at $150 million. This is a drop in the bucket compared to its $16 billion market cap. Its debt to book equity was just 8%.

The company produced $258 million in free cash for the first nine months, despite vastly increasing its capex by 66%, to $423.2 million.

There appears to be plenty of opportunity for growth, with 1,154 Ross Dress for Less stores in 33 states and Washington D.C. and 131 dd's in just 10 states. Larger rival TJX Companies(NYSE:TJX) operates over 3,200 stores throughout the U.S., Canada, and Europe. This includes 1,075 T.J. Maxx stores, 941 Marshalls, and 448 HomeGoods in the United States. It has a presence in all 50 states.

TJX does have very strong balance sheet, and has been returning cash to shareholders. Total debt stood at almost $1.3 billion, but that is not much when compared to its $45 billion market cap. Its debt to book equity was 31%. The company has spent almost $1.0 billion on repurchasing shares this year.

Fellow retailer Kohl's, offers a variety of sales events. However, its results have not been stellar thus far this year. For the first nine months of the year, sales were essentially flat at $12.9 billion, but same store sales were down 0.9%. Its net income fell nearly 9%, to $555 million. Share buybacks helped diluted earnings per share, but this fell 1.2%, to $2.51. However, it has borrowed more money, with total debt and capital lease obligations increasing to $4.9 billion, from $4.6 billion a year ago. Its debt to market cap currently stands at over 40%, and its book debt to equity ratio has risen to over 82% from 75%. Despite this, its stock price is up more than 30% this year.


Final thoughts
The valuation has become more attractive, thanks to the recent fall in the stock price. It now trades at a P/E of 19 times earnings. While this is not cheap, it was 21 times before the quarterly earnings and guidance announcement. This is the same level where TJX currently trades.

Unlike its merchandise, investors have to pay up a bit for a quality company. Ross keeps producing positive comps and growing earnings per share nicely. It still has plenty of free cash flow to raise dividends and buy back shares. In the meantime, it is slowly adding stores. This year, it opened 63 Ross Stores, and 23 dd's.

For an added benefit, the company typically has done well in economic downturns. Vendors have more merchandise to ship, and people crowd the store in a hunt for bargains. However, this is one company that should remain stylish, no matter the economic environment.

Fool contributor Lawrence Rothman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.