Ross Stores (NASDAQ: ROST) isn’t a cheap stock trading 24 times its earnings, but it is a value for investors. Competitor TJX Companies (NYSE: TJX) trades at a similar valuation, about four handles greater than the average S&P 500 (NYSEARCA: SPY) stocks, for a reason. These companies are perfectly positioned for today’s retail environment and are among the best-operated businesses in America.

Like any retail segment, off-price retail has its ups and downs, but it can profit in all conditions, and foresighted management teams keep the companies in fortress conditions. Today’s takeaway is that off-price retailers like Ross Stores outperform expectations, raise guidance and return, and build shareholder value. 

Ross Stores Beats and Raises: Analysts Lead Stock to New High

Ross Stores had a solid quarter, with revenue in Q1 growing 8%, accelerating from the previous year’s 4.65% to outpace consensus by 140 bps. The increase was driven by a 3% systemwide comp store gain compounded by a 4.5% increase in store count. The margin is also strong. Operating margin improved by 205 basis points on improved costs and spending discipline offset by a planned decline in merchandise margin. The net result is a 31.5% increase in net earnings and a 33% increase in generally accepted accounting principles (GAAP) earnings per share, aided by share repurchases. 

Guidance is solid. The company issued favorable guidance for Q2 and potentially cautious guidance for the year. The company expects Q2 results above the consensus estimate reported by Marketbeat at the time of the release and raised the outlook for full-year earnings. Full-year revenue guidance was maintained at 2% to 3%, but the outlook for earnings improved. The company targets a mid-point of $5.88, below the consensus estimate but much better than feared.

Analysts responded favorably to the news and issued multiple price target revisions. All but one tracked by Marketbeat are upward, all but one are above the consensus estimate, and the sole outlier is a reiterated target also above the consensus estimate. The takeaway is that consensus implies a 10% upside and a new all-time high, while the freshest targets add as much as 13%. Ross Stores stock could hit a new all-time high soon in these conditions. 

Ross Stores Capital Return is Worth the Money

Ross Stores trades at an elevated valuation, but it is worth the money because of its strong balance sheet and capital return. Balance sheet highlights include a cash build despite increased store count and associated inventory. Current and total assets are up, while liabilities are flat. A debt payment is due, but cash is robust and covers the payment. The debt-to-cash ratio, including current and non-current portions, is near 0.5 times cash and is lower compared to equity, which is also up. Shareholder equity is up by 6.5%. 

Regarding capital returns, the dividend isn’t much at a 1.% yield but is reliably safe and growing. The company cut distributions during the height of the pandemic but quickly resumed payments and has a solid history of increases. The payout ratio is attractively low at 23% of this year’s outlook, and the distribution compound annual growth rate (CAGR) is near 8%. 

Share repurchases compound the distribution and were worth $262 million in Q1, helping to reduce the average count by 1.8% year over year. There is nearly $2 billion left under the current authorization; the company plans to buy back $1.05 billion this year, or about 2.2% of the count. 

Ross Stores: A Trend-Following Signal Hits Critical Resistance

Ross Stores' chart looks bullish with a solid trend-following signal on the weekly view. The signal is backed up by a bullish signal in the stochastic that moving average convergence divergence (MACD) may follow. However, the market is also facing resistance at a critical level, as seen in the daily view. 

The resistance resulted in a doji candle that could easily become a Shooting Star and Abandoned Baby. In this scenario, the market will be unable to move above $145 and become range-bound at current levels or correct to deeper levels, which is not expected. A new high is likely if this market can sustain its upward push and break above $145.