Ross Stores Fashioning Growth: Analysts See Double-Digit EPS Rise

Key Points

• Ross Stores said it would add approximately 100 new stores during fiscal 2023.
• Revenue grew at a 4% rate in each of the past two quarters.
• Earnings rose by 26% and 12%, as the company beat top-and-bottom-line expectations in the last three quarters.
• Analysts expect low double-digit earnings growth in fiscal 2023 and 2024.
• MarketBeat's analyst ratings show a "moderate buy" consensus with a price target of $119.65.

Ross Stores Inc. NASDAQ: ROST is trading higher for the week, following news that the company is opening new locations at a fast pace and is on track to add about 100 new stores during fiscal 2023. 

The stock has been forming a cup-shaped pattern that’s corrected 19% so far over 28 weeks. You can clearly see that pattern on the Ross Stores chart.  

The company opened 18 flagship Ross Dress for Less stores, as well as nine dd's Discounts stores in 14 different states in June and July. These new locations are part of the company's plans to add about 75 Ross and 25 dd's Discounts stores this fiscal year.

In a statement announcing the store openings, Gregg McGillis, a Ross Stores’ vice president from the real estate unit said, "These recent openings reflect our ongoing plans to continue building our presence in both existing and newer markets" 

He noted that the new locations included the first six Ross stores in Michigan, and dd’s Discounts expanded its presence in Arizona, California, Florida, Georgia, Oklahoma, and Pennsylvania. 

Aiming For 2,900 Stores

“Looking ahead, we remain confident in our ability to grow to at least 2,900 Ross Dress for Less and 700 dd's Discounts locations over time,” McGillis said. 

Together, Ross Dress for Less and dd's Discounts currently operate a total of 2,061 locations in 41 states, the District of Columbia, and Guam.

Revenue grew at a rate of 4% in each of the past two quarters, while earnings grew by 26% and 12%. According to MarketBeat’s Ross Stores earnings data, the company beat top and bottom line expectations in each of the past three quarters. 

The company’s chief rivals in the discount clothing space are The TJX Companies Inc. NYSE: TJX and Burlington Stores Inc. NYSE: BURL. In addition to clothing, all three sell home decor, housewares and other items, such as luggage, meaning mass market retailers such as Target Corp. NYSE: TGT are also rivals. 

It might come as a surprise to learn that of those companies, TJX has the largest market capitalization, $98.18 billion. Target comes in at $62.14 billion, Ross Stores at $38.22 billion, and Burlington at $11.25 billion. 

Filed under “who knows why,” Target is classified as a consumer staple stock, but TJX and Ross are classified as consumer discretionaries within the S&P 500. Burlington is classified as a mid-cap stock and not tracked by the S&P 500. 

Business Model Tilts Toward Low Prices, Fast Turnover

The three discount clothing retailers have a business model that may be more reminiscent of Dollar General Corp. NYSE: DG than Nordstrom Inc. NYSE: JWN. 

Average prices tend to be fairly low. In 2022, Ross’ gross profit margin was 24.5%. That’s not bad for a company in the retail industry, where profit margins tend to be lower than other types of businesses. 

Ross and the other discount clothing retailers have limited marketing budgets, although Ross does run TV commercials and devotes resources to social media marketing. 

Ross benefits from fast turnover of inventory, which reduces the amount of capital a retailer has parked in unsold merchandise on shelves. 

Analysts See Double-Digit Growth

Analysts believe the company will grow earnings at low double-digit rates in fiscal 2023 and 2024. Those estimates were revised higher recently. 

MarketBeat’s Ross Stores analyst ratings show a consensus view of “moderate buy,” with a price target of $119.65, an upside of 6.64%. That price target has increased in the past month. 

Ross’ chart pattern is taking its time to form, shaping a cup pattern in an orderly fashion. The current consolidation is forming below a January high of $122.44. 

The stock didn’t immediately get any traction after the company’s May 18 earnings report, but shares are up 4.43% in the past month and 8.34% in the past three months, reflecting the strength of recent rallies.

The stock has some work to do before regaining its January highs; however, its next earnings report, due on or around August 17, may serve as a catalyst for a price move in either direction.

Ross Stores dividend data show a yield of 1.19%. The company boosted its shareholder payout in the past two years, after reducing it sharply in 2020.