Ross Stores (ROST) Equity Research Note

Overview

Ross Stores is one of the largest off-price apparel and home fashion retailers in the United States, operating a large and growing national store base. With a market capitalization of approximately $62.3 billion, ROST is a scaled player in a structurally attractive value segment of retail.

The shares currently trade at a trailing P/E of about 30x and a forward P/E near 26.8x, reflecting the market’s expectation of continued earnings growth and resilience. Institutional ownership is very high at roughly 94%, and the consensus analyst rating tilts bullish (recommendation key: “buy,” with an average rating score of ~1.72 on a 1–5 scale). The average target price is around $192.7, with a range from $139 to $221, indicating generally constructive sentiment but some dispersion in views on upside.

From a balance sheet and liquidity perspective, Ross maintains a current ratio of about 1.52, indicating solid near-term liquidity, while carrying a debt-to-equity ratio of roughly 88.2, a moderate leverage profile for a mature retailer. The stock has outperformed the broader market over the last year, with a 52-week price change of roughly +26.6% versus about +19.4% for the S&P 500, supported by double-digit revenue growth and margin recovery.

Profitability and Cash Flow

Ross demonstrates strong underlying profitability metrics for a brick-and-mortar retailer:

• Operating margin: ~11.6%
• EBITDA margin: ~14.1%
• Net profit margin: ~9.5%

These margin levels place Ross in the upper tier of specialty/apparel retailers and broadly competitive with other scaled off-price peers. The company’s high return on equity (ROE) of about 37.4% underscores efficient use of shareholder capital, aided by healthy margins and moderate leverage.

On valuation versus fundamentals:

• P/E (trailing): ~29.96x
• Forward P/E: ~26.77x
• Price-to-sales (TTM): ~2.83x
• Price-to-book: ~10.53x

The elevated P/B reflects the asset-light, high-ROE economics and the market’s willingness to pay up for a durable off-price model. The spread between trailing and forward P/E suggests the market anticipates continued EPS growth.

Free cash flow generation is solid, with free cash flow of roughly $1.51 billion, providing ample capacity for share repurchases, dividends, and reinvestment in new stores and supply chain. While detailed cash flow history is not provided, the current FCF level in conjunction with mid-teens EBITDA margins indicates a healthy FCF conversion profile typical of successful off-price retailers.

Earnings vs. Estimates

The earnings history provided is extensive and indicates a long, multi-decade record of generally meeting or modestly beating consensus EPS expectations, with a notable COVID-related disruption.

Recent years show:

• A temporary EPS collapse in 2020 amid pandemic store closures (e.g., one quarter with EPS estimate of -$0.01 vs. actual -$0.87, a very large downside surprise of over -6,600%). This was followed by:
• A strong rebound with large positive surprises as the business normalized (e.g., EPS estimates of $0.89, $0.96, and $0.77 vs. actuals of $1.34, $1.39, and $1.09, equating to positive surprises of ~51%, 45%, and 42% respectively).
• More recently, EPS performance has normalized to consistent, modest beats:
  • Estimate $1.65 vs. actual $1.82 (+10.2%)
  • Estimate $1.36 vs. actual $1.46 (+7.7%)
  • Estimate $1.49 vs. actual $1.59 (+6.8%)
  • Estimate $1.40 vs. actual $1.48 (+5.6%)

The pattern suggests management is executing well in the current environment and guiding prudently, enabling recurring low-to-mid single-digit percentage beats after the post-COVID normalization.

Growth Profile

Current snapshot metrics point to a balanced growth story:

• Revenue growth: ~10.4% (most recent trailing period)
• Earnings growth: ~6.8%

Double-digit top-line growth combined with high-single-digit earnings growth illustrates that ROST is still a growth compounder despite its size. The delta between revenue and earnings growth suggests some reinvestment and/or modest margin pressure, but profitability remains robust.

Key growth drivers include:

• Store expansion: Continued white space in underserved U.S. markets, particularly in smaller and mid-sized metros.
• Product assortment optimization: Leveraging buying scale and vendor relationships to source branded goods at a discount.
• Improving productivity: Ongoing work in inventory turns, markdown optimization, and supply-chain efficiencies that support margin.
• Macro tailwinds: In inflationary and uncertain environments, off-price retailers typically benefit from trade-down behavior as consumers seek value.

From a market perspective, ROST’s 52-week performance (+26.6%) outpacing the S&P 500 (+19.4%) indicates that investors are rewarding the growth and recovery trajectory. The forward P/E premium versus many general retailers reflects expectations of sustained mid-to-high single-digit EPS growth over a multi-year horizon.

Given the available data, there is no explicit multi-year forward revenue or EPS guide in the context, so long-term projections must remain qualitative. However, the combination of ~10% revenue growth, high ROE, and strong FCF supports a credible case for continued mid-teens total shareholder return potential over a full cycle, assuming steady store growth and stable margins.

Competitive Landscape

Ross operates squarely in the off-price/value retail segment, competing with both pure-play off-price chains and value-oriented department stores and discounters.

Key Competitors

1. The TJX Companies (TJX)
   • The largest off-price apparel and home fashions retailer globally (T.J. Maxx, Marshalls, HomeGoods, etc.).
   • Strengths in international diversification and home goods.
   • TJX enjoys similar or better scale advantages, posing an intense competitive benchmark. Ross’s differentiation rests on its focus on U.S. markets and slightly different merchandising approach, but the overlap in customer value proposition is high.
2. Burlington Stores (BURL)
   • Smaller off-price peer with an increasing focus on inventory depth and store productivity.
   • Generally trades as a higher-beta, higher-growth off-price name, but with historically more margin volatility.
   • Ross’s larger scale and somewhat more conservative financial profile may appeal to investors looking for a more established, lower-volatility off-price exposure.
3. Nordstrom Rack (JWN off-price segment)
   • Off-price banner of Nordstrom, focused on more fashion-forward and often higher-end brands.
   • Rack overlaps with Ross on value-seeking customers but tends to skew more toward branded and department-store clearance.
   • Rack’s performance and strategic focus have been more mixed in recent years, while Ross has shown steadier execution and stronger margin consistency.
4. Macy’s Backstage (M)
   • Off-price concept nested within or adjacent to Macy’s full-line stores.
   • Still smaller scale and less established than Ross and TJX.
   • While Backstage increases competitive intensity in certain markets, Ross benefits from a simpler, dedicated off-price operating model without the legacy full-line department store footprint.
5. Kohl’s (KSS)
   • Not strictly off-price, but value-oriented department store with frequent promotions and an increasingly off-price-adjacent positioning in some categories.
   • Competitive primarily on price-sensitive apparel and home shoppers.
   • Kohl’s complexity and promotional model contrast with Ross’s simpler everyday value proposition, which may support Ross’s relative margin resilience.

Competitive Positioning

Ross’s competitive advantages include:

• Scale and buying power: With tens of billions in annual sales, Ross can negotiate favorable terms and opportunistically purchase closeouts and excess inventory, feeding its “treasure hunt” model.
• Lean operating structure: The company maintains a no-frills store format and tight cost controls, helping support its ~11.6% operating margin and ~14.1% EBITDA margin.
• Value-focused brand: Strong resonance with lower- to middle-income consumers seeking national brands at discounts, particularly in times of economic stress.

Key competitive challenges:

• Limited e-commerce: Off-price economics are traditionally less conducive to online models; Ross has remained primarily brick-and-mortar. While this supports margins, it may limit growth opportunities relative to omni-channel peers.
• Vendor relationships and inventory access: The success of the off-price model depends heavily on continued access to attractive branded inventory; greater competition from TJX, Burlington, and emerging off-price or liquidation channels could tighten supply or compress gross margin.

Overall, Ross is well-positioned within the off-price ecosystem, with metrics indicating durable profitability (ROE ~37%, profit margin ~9.5%) and healthy growth (revenue growth ~10.4%, earnings growth ~6.8%). The primary investment debate revolves around valuation (P/E ~30x), cyclicality of the value consumer, and ongoing competitive intensity versus the upside from continued store growth, margin efficiency, and consistent capital returns.