E Ross: The Bargain Store Becomes A Bargain

Ross Stores (ROST) has cratered by 17.5% year to date, despite decent first quarter results. I think it's one of the better retail stores out there, and faces less threats from Amazon (AMZN) than many of its retail peers. "There's always a bargain in store" is plastered on the first page of the company's annual report, and I think that this might also be a fitting description of its shares as well.

What makes Ross better than most?

Ross earns very impressive headline returns on invested capital, likely far in excess of its weighted average cost of capital, or WACC. I created the below chart (and all others in the rest of the article) in Excel using data from its 10-K.

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Ross has earned ROIC over 20% sustainably going back at least a decade, touching a little over 48% at its peak in 2013. It appears the company's capital structure is very "debt light" as well, but Ross also utilizes quite a bit of leases that I'd like to theoretically capitalize and insert back onto the balance sheet. To accomplish this, we first need to discount these leases to obtain an estimate of their present value. I used the company's pretax cost of debt as the discount rate.

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Now that we have this estimate, we can inject these liabilities back into the capital structure to get an adjusted debt-to-equity ratio.

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We can see that by capitalizing the leases, the firm's debt-to-equity ratio jumps to over 1x. This has implications for its ROIC as well.

Adjusting ROIC for off-balance sheet leases...

To gain insight into what effect the newly capitalized leases will have on Ross' return on invested capital, we need to start by adjusting its net operating profit after tax, or NOPAT (the numerator in the ROIC equation). The first step involves adjusting the firm's operating profit, or EBIT, first.

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Articles I write for TalkMarkets represent my own personal opinion and should not be taken as professional investment advice. I am not a registered financial adviser. Due diligence ...

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Old Time Investor 11 months ago Member's comment

Taking a closer look at $ROST, thanks.

Barry Hochhauser 11 months ago Member's comment

I've written off retail stores convinced that they simply can't compete with the size, reach and initiative for innovative ideas that #Amazon has. But you've painted a good case as to why #RossStores are worth a closer look. $AMZN $ROST

Doug Morris 11 months ago Member's comment

Yes, sounds worthwhile by the numbers. But what are Ross Stores? I've never heard of the company. What do they sell? And does Amazon sell it too? If so, I suspect they'll eventually be squeezed out. Especially once Amazon starts opening up more physical locations.

Ayelet Wolf 11 months ago Member's comment

You've never heard of $ROST? #RossStores sell discounted clothing. It is the second-largest off-price retailer in the US!

Catchy article title by the way.

Doug Morris 11 months ago Member's comment

Doesn't Amazon sell all kinds of clothing, including discounted? I don't understand the author's assertion that they are immune to pressure from Amazon? Or at least less so than other retailers. Why?

Ayelet Wolf 11 months ago Member's comment

That's for the author, Joseph Harry to answer.

Alpha Stockman 11 months ago Member's comment

Enjoyed this thanks. I've added you to my follow list.

Joseph Harry 11 months ago Author's comment

Thanks for reading and the follow!

Alpha Stockman 11 months ago Member's comment

The pleasure is mine.