Ross Stores: A Great Company But The Stock Is Too Expensive

Ross Stores (ROST) operates a chain of off-price retail stores offering high-quality, in season name brand and designer apparel, shoes, cosmetics, accessories and home merchandise at discounts of 20-60% below mainstream retailers. The company has grown profits and dividends at a 15-20% annual rate over the past 10 years, earning a 25%+ return on equity. While current retail environment experienced difficulties in the recent recession, ROST's off-price business model continued to produce above-average results because:

comparable store sales are on the rise,

its ability to deliver name brand merchandise at steep discounts should raise consumer loyalty allowing it to continue to grow even as the economy improves,

it is focused on strict inventory management giving it flexibility to take advantage of close outs, raise its merchandise turn and reduce markdowns,

better-than-expected performance from its dd's DISCOUNTS subsidiary.

The primary negative for this company is that retailing is an intensely competitive business.

ROST is rated A by Value Line, has a 10% debt-to-equity ratio and its stock yields 1.0%

Statistical Summary

	Stock Yield	Dividend Growth Rate	Payout Ratio	# Increases Since 2001
ROST	1.0%	17%	16%	10
IND*	1.2	10	21	NA

	Debt/Equity	ROE	EPS Down Since 2001	Net Margin	Value Line Rating
ROST	10%	42%	1	8%	A
IND	12	13	NA	5	NA

*IND is the average of the Retail (Softlines) Industry as compiled from Value Line

Chart note: ROST stock made great progress off its December 2008 low, quickly surpassing the down trend off its September 2008 high (red line) as well as the November 2008 trading high (green line). Long term the stock is in an up trend (straight blue lines). It is also in an intermediate term up trend (purple lines). The wiggly blue line is on balance volume. The Aggressive Growth Portfolio does not own a position in ROST, having Sold it at slightly lower levels. While the fundamentals of ROST are strong, we believe that it is being generously valued at its current price. Hence, we would avoid buying this overpriced stock at these levels.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.