May 16, 2008 - Ross Stores (ROST-NASDAQ) wants to let you dress (and lots more) for less. The off-price retailer operates about 890 Ross Dress for Less and dd's DISCOUNT stores that sell mostly closeout merchandise, including men's, women's, and children's clothing, at prices well below those of department and specialty stores. Although apparel accounts for more than 50% of sales, the stores also sell small furnishings, educational toys and games, luggage, and gourmet foods in select stores. Featuring the Ross "Dress for Less" trademark, the chain targets 18- to 54-year-old white-collar shoppers from primarily middle-income households. Ross stores are located in strip malls in 27 states, mostly in the western US, and Guam.

First come sales, then come earnings. In the first two months of this year, dress sales were up 20% for same-store sales comps. Revenues for 2007 were $5.975 billion. Analysts predict $6.5 billion this year and $6.95 billion next year. On average, sales should increase by 11.5% a year over the next 5 years, according to analysts.

On the earnings side, they were $1.90 last year. Expect $2.25 this year and $2.60 next year, if analysts are right. Over the next 5 years, look for earnings to increase by 16% a year, on average.

Part of Ross's inventory is discounted, branded merchandise from full price stores. With a slowdown in the economy, supply increases. Ross picks and chooses, and pays less in these times, taking advantage of closeouts from retailers and manufacturers. Expect better quality goods with tight inventory controls for improved earnings. Also, with better inventory management, Ross can react to fashion changes more quickly. With better quality and inventory management, profitability should increase nicely.

The company is initiating new merchandising programs. Over the next 3 years, it plans to incorporate new system enhancements and process changes that will facilitate better planning, buying and allocating products to regions and specific stores. Roll out will be about 15% of product categories this year, 50% in 2009 and full implementation by 2010.

Some numbers: First and foremost: Return on Equity. It's 28% currently with analysts forecasting 27% for the next 2 years. Net profit margin is 4.4%. Current assets are better than current liabilities by a factor of 1.4 to 1. There's a dividend of 38 cents a year, for a yield of 1.2%. Officers and directors own 3.4% of the stock. Market cap is 4.8 billion with 133.182 million shares outstanding.

Ross stock is hitting all-time highs. Investors see the benefits of the company's position and strategy. Still, it doesn't appear that the valuation is startling with a p/e (price to earnings) ratio of 14. In 2004, it carried a p/e of 22 for the average of the year. Look more deeply into this stock if you want to add a retailer to your portfolio, in spite of the poor retail environment, because this store definitely has a competitive advantage.

- Company Web site: www.rossstores.com

- Ted Allrich