Ross Stores Inc.

(ROST)
January 2, 2020

COMPANY DESCRIPTION

Ross Stores Inc. (ROST) is the United States’ second largest off-price retailer. Ross has about
1,480 stores operating as Ross Dress for Less and another 200 operating as dd’s DISCOUNTS.
Both chains target women and men between the ages of 18 and 54. About 80% of Ross Stores’
customers are primarily women shopping for themselves or their family. Ross sells to middle-
income consumers while dd’s aims to appeal to low-to-moderate income customers.

INVESTMENT THESIS

ROST should report post solid same-store sales growth and increase market share over the next
two years. Because it sells goods at a discount, Ross Stores has long been able to grow in both
weak and strong economies. It should be able to increase square footage at a mid-single-digit
pace over the next several years.  Ross is shareholder friendly in that it repurchases its shares and
raises its dividend.

RECENT DEVELOPMENTS

On November 22, Ross Stores reported 8% higher revenue driven by a 5% gain in same-store
sales. Third-quarter results were broad-based across all categories and regions, which we think
augurs well for the holidays and 2020. The operating margin of 12.4% was in line with our
estimate.

Turning to the bottom line, third quarter earnings rose to $1.03 per share from $0.91, above the
consensus estimate of $0.97.

Management raised its FY19 earnings guidance to $4.52-$4.57 from $4.41-$4.50 per share.

EARNINGS & GROWTH ANALYSIS

We expect revenue to increase 7% in FY 19, slowing to 6% in FY 20. The improvement in both

years reflects the opening of 75 Ross and 25 dd’s DISCOUNTS. We project same-store sales
growth of 4% in FY 19 and slightly higher same-store sales in FY 20. We project the gross
margin will fall slightly from 29% to 28% in FY 19 and recover slightly in FY 20. We forecast
the operating margin will stay flat at 13.6%, reflecting higher wages and headwinds from timing
of packaway-related expenses that benefited FY 18. We assume an effective tax rate of 24% and
project capital expenditures of $600M in FY 19 and FY 20, which includes investments in a new
distribution center.

For FY19, we project earnings of $4.64, rising to $4.90 per share in FY20.
RISKS

Risks include higher operating expenses due to wage hikes and higher freight costs. Some of the
company’s low-income customers could see their purchasing power reduced by inflation or a
recession.  Conversely, an improvement in the economy could cause some of its customers to
trade up to higher –quality goods. Ross Stores faces aggressive competition from the likes of TJ
Maxx, Marshalls and, more recently, Macy’s.

VALUATION

Our 12-month target price of $140 implies a multiple of 28.6 times our 2020 earnings estimate.
The shares are currently trading at 23.7 times our FY20 estimate and, in our opinion, warrant a
higher multiple based on prospects for additional stores, better margins and prospects for higher
same-store sales. Our target price, if achieved, offers investors the prospect of a more than 21%
return, including its dividend.

Ross Stores Inc. (ROST)

Current Price: $116.34

Target Price: $140

Current Valuation: 23.7 times FY20 EPS

Target Valuation: 28.6 times FY20 EPS