Growth Stocks: Ross Stores

Ross Stores is an American "discount" chain of stores. It is the second most successful balance sheet store in the US, behind TJX Companies. Its headquarters are located in Dublin, California. Ross currently operates 1,483 stores across the US It primarily sells two discount retail clothing brands and one home fashion store.

It is a leader because management executes off-price purchasing strategies that allow the company to offer heavily discounted merchandise. If the company manages its real estate assets effectively and labor-saving technologies reduce the FCF margin, the price could go up to $ 200 based on discounted cash flows for 2026.

Analyst estimates indicate a sales increase of 46% -52% and an EBITDA margin of 9% -17% from 2022 to 2026. Free cash flow without leverage could grow from $ 1,490 million in 2020 to $ 2,200 billion in 2026. This would mark a ratio of FCF / Sales of the company that would be close to 9.9%.

If Ross Stores, Inc. (ROST.US) continues to execute its off-price purchasing strategies and marketing efforts are successful, the forward FCF implies a valuation of $ 147.

With the labor-saving technologies included in the company's store design and proper property management, even the $ 200 would mark a justified valuation.

Ross Stores plans to open new stores to offer quality brands at deep discounts

The garment mix appears to be well diversified. In addition, customers can also buy accessories, perfumes, jewelry and much more. What will make the company's income guidance less volatile:

source: ROST IR

Management intends to invest in its employees and continue to offer quality. It is focused on increasing the market share of other retailers that are closing their stores or are about to do so. With these objectives, the management has been very successful in the past and could be sustained in the future.

Committed to value

Based on its own considerations in the last results report, the company defined its objectives:

“Our top priority is ensuring access to great brands at great savings every day:

• Reflected in continuous investments in people and processes in our commercial organization
• Our highly-rated dealers purchase products from thousands of suppliers and manufacturers, allowing constant access to quality brand offerings that our customers value.

Consumers will continue to search for bargains:

• A more value-focused buying behavior is allowing Ross DISCOUNTS to attract customers
• Offering the best deals available retains these customers
• Also increase the market share of retailers that have closed stores and / or have gone bankrupt. "

Balance

The financial position of the company appears solid. Since August 2020, the total amount of cash has increased from $ 3.7 billion to more than $ 5.56 billion. Significant revenue growth would be expected when the company uses its cash to open new stores and to launch communication campaigns:

source: ROST 10-Q

With about $ 2.45 billion in long-term debt, its obligations are not a concern, since the company's net debt is negative:

source: ROST 10-Q

Regarding its debt issues, Ross maintains $ 13 billion in contractual obligations, including purchase obligations worth $ 5.52 billion. Assuming a free cash flow of $ 2 billion, the total amount of obligations is a multiple of 6x-7x, which is also below the average for its industry.

If the company's marketing efforts and discount buying strategies continue to be successful, ROST.US could be worth $ 147.

The figures below provide information on the expectations of various analysis houses. Expectations include sales growth and FCF growth with FCF / Sales of 14% -8% from 2021 to 2024.

source: market screener

Risks

Events that can damage the reputation of the company

Ross Stores sells merchandise because customers trust the integrity of the company and respect the brand. Investors will most likely understand that the company's reputation could be damaged by any incident with suppliers, store owners, or protests unrelated to the company's business. In that scenario, the business may report less revenue and free cash flow may decrease. As a result, FCF's expectations could decline, leading to a significant decrease in the company's valuation.

Changes in customer trends and preferences

The Executive continually tries to identify customer trends and preferences. The company obtains the inventory in advance and needs to have very controlled the needs of new customers. It is a process that could put the financial integrity of the company at risk. If the company cannot adjust its inventory mix to the changing customes of consumers, revenue could grow less than expected. In this case, consumers can visit fewer stores and the FCF can decrease. The end result of this process will be a dramatic decrease in the valuation of Ross Stores, Inc.

Technical Analysis and Conclusion

Assuming that the company's off-price buying strategies will be successful and that the marketing efforts will generate revenue, resulted in a price target of $ 147. While taking other valuation measures into account, if Ross manages his real estate assets effectively and labor-saving technologies lower FCF's margin, the price could even exceed $ 200. There are some risks. However, with the current stock price of $ 110 to $ 115, the company really looks like a great opportunity.

source: xStation

The target price is between the extended Fibonacci retracements (161,8%) of the main correction (recent highs) and the minor correction (recent double top). From the pivot point in the support of the main guideline, the projection could reach the price in the coming months if the assumptions of the analysis and the company's objectives are met.

Darío García, EFA
XTB Spain