When I went bargain shopping last October looking for a few new outfits, I not only found a great discount on clothes, I also found a winning investment idea that has been producing averaging monthly gains north of 3%. In fact, this stock is up over 82% since I bought it, and I believe the best is yet to come.
Its winning strategy has been focused on frequently refreshing its merchandise, which provides a "treasure hunt" atmosphere for customers. This encourages repeat customers and visits. It has also consistently returned value to shareholders through aggressive share repurchases and cash dividends.
There are many choices when it comes to your investment dollars, and retail can be a bit tricky right now. More cyclical retailers like Coach Inc. (NYSE: COH), Lululemon Athletica (Nasdaq: LULU) and Bed, Bath, and Beyond (Nasdaq: BBBY) have seen major hiccups in this tough economy. Even at discount retailers like Wal-Mart (NYSE: WMT), Dollar General (NYSE: DG) and Dollar Tree (Nasdaq: DLTR), margins have been squeezed and earnings growth has been subdued.
The one retail stock that stands out to me is Ross Stores (Nasdaq: ROST).
Ross is one of the largest off-price retailers of brand-name apparel and home accessories. It operates about 1,050 Ross Dress for Less stores and 100 dd's Discounts stores in the United States, with ambitious plans to rapidly build 2,500 new locations.
Ross Dress for Less offers merchandise at prices that are 20% to 60% below most department stores, while dd's Discounts stores are a similar concept that offers 20% to 70% off more moderate discount and department stores.
In order to keep customers coming back, it makes sense to mix things up. Ross is able to target a broad consumer base by drawing on a large variety of vendors to acquire quality inventory at overstock prices. It also uses a flexible approach to merchandising by bringing in a diverse product lineup, so what you see in the store one week might not be there the next. This prevents things from becoming stale in its stores and helps Ross stand apart from competitors.
Ross has huge room for growth. It is about one-third the size of TJX Companies (NYSE: TJX), purveyors of TJ Max and Marshall's stores.
Ross' extensive buying presence consists of around 500 buyers across its brands and nearly 8,000 vendors, making it extremely difficult for smaller, off-price retailers to compete.
Look at how shares of Ross Stores have steadily gained since 2011...
Check out the highlights of the company's second-quarter results:
- Sales increased 12% to $2.3 billion
- Same-store sales growth of 7%
- 25 net new store openings (Ross and dd's brands)
- Gross margins increased 80 basis points to 27.8%
- SG&A ratio of 15% (increase of 30 basis points year-over-year)
Not only did Ross produce superior financial results, it helped shareholders by buying back 1.7 million shares for $113 million. Management has confirmed it is dedicated to buying back a total of $450 million worth of shares over the course of the fiscal year. I think the board will approve another repurchase upon completion of the current plan, which authorized $900 million worth of stock purchases during a two-year period.
Risks to Consider: Ross has been in rapid expansion mode for some time as it continues to add stores to new markets. This can be risky, as it must compete with larger retailers, like TJX Companies, which has more than three times the number of stores.
Though consumers have been forced to become smarter shoppers, there is no guarantee that when consumer confidence stabilizes and spending improves, they won't go back to full-price retailers.
Action to Take --> Buy Ross Stores (Nasdaq: ROST) up to $75 a share. This one could hit $100 in the next six to 12 months. It has a solid growth strategy and has already bought back more than 2 million shares. Management is aggressive, and its bets have paid off considerably during the past year. There's no reason to think the success can't continue.