Expanding Product Lines And Critical Expansions Fuel Optimistic Growth Projections

Key Takeaways

• Expansion and enhancement of vendor partnerships alongside aggressive store expansion plans are key strategies for boosting revenues and market share.
  
• Investments in automation and a $1.05 billion stock repurchase program indicate operational efficiencies and management's confidence in future growth.
  
• Aggressive expansion and shifting strategies amid economic uncertainties pose risks to profitability and sales expectations for Ross Stores.

Catalysts

Operates off-price retail apparel and home fashion stores under the Ross Dress for Less and dd’s DISCOUNTS brand names in the United States.

• Expansion of vendor partnerships and new vendor additions to improve product assortment and value offerings could lead to enhanced product margins and increased customer traffic, impacting revenues and net margins positively.
  
• Continuation and amplification of the brand strategy focus, with a priority on offering branded merchandise at compelling value points, may drive an increase in average unit retail (AUR), influencing both top-line growth and product margins.
  
• Investments in automation within distribution centers and stores, alongside other cost-saving initiatives, are expected to lead to operational efficiencies, lowering distribution, freight, and operating costs, and subsequently improving operating margin.
  
• Aggressive store expansion plans with the opening of approximately 90 new locations in the fiscal year can lead to revenue growth and market share gains, augmenting both top-line sales and geographical diversification of earnings.
  
• Stock repurchase program of $1.05 billion for the year signals strong cash flow generation and management's confidence in future growth, likely leading to an increase in earnings per share (EPS) through reduced shares outstanding.

Assumptions

• Analysts are assuming Ross Stores's revenue will grow by 5.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.8% today to 10.2% in 3 years time.
• Analysts expect earnings to reach $2.5 billion (and earnings per share of $7.98) by about October 2027, up from $2.1 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.2x on those 2027 earnings, up from 22.3x today. This future PE is greater than the current PE for the US Specialty Retail industry at 14.5x.
• Analysts expect the number of shares outstanding to decline by 1.44% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.97%, as per the Simply Wall St company report.

Risks

• High cost of necessities for low- to moderate-income customers pressures their discretionary spending, potentially affecting retail sales and earnings.
  
• Challenges in forecasting sales due to an uncertain external environment could lead to missed expectations and impact future profitability.
  
• Planned merchandise margin pressure from increased brand strategy efforts could lead to decreased net margins.
  
• The aggressive expansion of opening new stores amidst an uncertain retail environment poses risks to achieving expected returns on investment affecting revenue growth.
  
• Increased distribution and operating efficiencies may not be sufficient to offset merchandise margin pressures, impacting overall profitability.

Valuation

• The analysts have a consensus price target of $171.05 for Ross Stores based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $190.0, and the most bearish reporting a price target of just $123.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $24.8 billion, earnings will come to $2.5 billion, and it would be trading on a PE ratio of 26.2x, assuming you use a discount rate of 7.0%.
• Given the current share price of $139.01, the analyst's price target of $171.05 is 18.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.