Scott Black on Ross,
from this week's Barrons:
My second stock is a medium-sized retailer, Ross Stores. The company, which is based in Newark, California, is doing extremely well, but the stock has been annihilated.
Q: You mean it's in the right space at the wrong time.
A: Last year the company generated $89 million in free cash and earned a 33.4% return on equity. It posted $1.70 a share, or roughly $150 million, net after-tax, on $2.5 billion in sales. Ross is a regional off-price chain that had 378 stores at the beginning of this year. Operations in four states -- California, Texas, Florida and Arizona -- account for 75% of sales. Historically the company has grown its square footage by 8%-9% a year. This year it will add 30 stores, and next year 35-40. A new store is break-even on a cash-flow basis within 18 months.
Q: How has Ross survived in an industry littered with corpses?
A: The key is smart buyers and a good markdown policy. They don't stand on ceremony if merchandise doesn't move. They just lower the price. Over the past five years revenues have compounded by just under 15% annually, and net after-tax earnings have jumped about 37% annually. And the company keeps buying back shares. This fiscal year they'll earn $2.07 a share, and in the year ending January 2002 we're looking for $2.38. A company earning 30% on book that generates over $100 million a year in free cash flow and has absolutely no debt ought to be worth more than six or seven times earnings. It's ludicrous. |
