Tuesday, January 23, 2007

ROST - Ross Stores Inc



Ross Stores operates two chains of off-price retail apparel and home accessories stores, which target men and women between the ages of 25 and 54, primarily in middle income households.

In 2004 and 2005, Ross suffered from poor reporting which led to high shipping costs, low product margins and too much differences of what is on the shelves and what a physical count turns up (shrink). Last year the company invested in new software and inventory systems which should help the bottom line.

In the most recent quarter revenues increased by 10% yoy and EPS increased by 21% yoy. Earnings are expected to increase 14% next year (vs. Industry avg of 11%) while the company sells at a P/E of just 17 on 2007 earnings of 1.90. On a Price-to-sales basis, Ross is undervalued by nearly a factor of 2 (0.83 to an industry average of 1.50) and also looks cheap on a Price to Free Cash Flow (TTM) comparison of 16x for ROST vs 28 for the industry.

Technically the stock broke through a 3 year resistance at 32 on January 12 and is now retesting the resistance / support level.

I'm looking to start a position at the $ 32 level and add more at $ 30 with a stop below the 200 MA.

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