Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

The Junk Pile

Are the Ross Stores a Value Investment?

Bottom-feeding department store operator the Ross Stores Inc. (NASDAQ: ROST) could be a value investment.

Interestingly, Mr. Market seems to buy the value argument for Ross. In fact, Ross’s share price rose from $107.50 on 4 October 2019 to $111.93 on 14 October 2019.

Consequently, Mr. Market thinks Ross’s growth prospects are good in America’s current economy. Notably, Ross claims to be “the largest off-price apparel and home fashion chain in the United States with 1,523 locations in 39 states, the District of Columbia, and Guam.”

Is Ross Profiting from Income Inequality?

To clarify, I think headlines about growing income inequality in America are driving investor interest in Ross Stores.

For instance, U.S. Census Bureau data indicates America’s income inequality is at its “highest level in 50 years,” NBC News claims. Moreover, NBC claims the biggest growth in inequality was in “six heartland states.”

Those states are New Mexico, Arkansas, Alabama, Nebraska, New Hampshire, and Kansas. My Google searches show Ross operates stores in five of the six heartland states; Nebraska, Kansas, New Hampshire, New Mexico, and Alabama, NBC News mentions.

Can Ross Profit from Income Inequality?

Hence, Ross sells discount clothing when many ordinary Americans have less money. Thus, average Americans have a stronger incentive to shop at Ross.

Consequently, Mr. Market is betting against America. I think Ross’s stock performance shows investors have little faith in America’s “economic recovery” or our government’s ability to fix economic positions.

Note: I think this could be good news for presidential candidates promising radical economic change. That includes U.S. Senator Bernie Sanders (I-Vermont), U.S. Senator Liz Warren (D-Massachusetts), and Andrew Yang (D-New York). Conversely, the growing income inequality and lack of faith in America, is bad news for establishment candidates like President Donald J. Trump (R-New York) and former Vice President Joe Biden (D-Delaware).

Is Ross Stores making Money?

Tellingly, Ross Stores Inc. (NASDAQ: ROST) is making money. In particular, Ross reported a quarterly gross profit of $1.136 billion on revenues of $3.979 billion on 3 August 2019.

Furthermore, Stockrow estimates Ross Stores had a 6.47% revenue growth rate in the last reported quarter. Hence Ross could be a growth stock.

In addition, Ross reported a net income of $412.72 million and an operating income of $544.05 million for the last quarter. Plus Ross reported an operating cash flow of $574.48 million and a free cash flow of $419.79 million the same period.

Finally, Ross Stores has cash. Ross reported $1.382 billion in cash and equivalents on August 3, 2019. Thus, Ross Stores is making money and growing in a difficult retail environment?

Can Ross Stores Compete with Amazon?

I think Ross Stores will have a hard time competing with 21st Century America’s favorite department store, Amazon (NASDAQ: AMZN).

For instance, Amazon’s cash supply is 41 times the size of Ross’s cash and equivalents. In detail, Stockrow reports Amazon had $18.847 billion in short-term investments and $22.616 billion in cash and short-term investments on 30 June 2019.

Therefore, Amazon can spend billions of dollars expanding its delivery services and developing private label apparel brands to compete with Ross. For instance, Amazon ordered over 2,000 Spartan Cargo large delivery vans from Supreme, Business Insider speculates.  

Amazon could use the Spartan vans for last-mile delivery making the Everything Store cheaper and more convenient for Prime subscribers. Moreover, the Spartan deal is one of several steps Amazon is taking to upgrade its delivery.

In addition, Amazon is ordering 20,000 Mercedes-Benz Sprinter vans from Daimler (DE: DAI). Plus, CEO Jeff Bezos claims Amazon could order 100,000 electric delivery vans from Rivian in the next decades, The Verge reports.

I think all those vans could make Amazon’s delivery so cheap and convenient no retailer could compete with it. For example, in 2025, a woman could order any piece of clothing she wants from Amazon and have it at her door step at a low price in two or three hours. Thus, the woman will not need to interrupt her Fortnight play or binge watching for clothes shopping.

Can Ross Survive in the Age of Amazon?

Thus, Ross could have a tough time competing and surviving in the age of Amazon. However, Ross Stores’ 6.47% revenue growth rate shows it can compete with Amazon now.

On the other hand, I think Ross will have difficulty competing with an Amazon that can bring low-priced clothing to anybody’s doorstep in a few hours. To explain, people will have an excuse not to go to Ross.

Hence, Amazon will give all the people who hate to shop an excuse not to shop. In addition, Amazon is betting on Americans’ laziness. Why get up off the couch and drive to Ross when Amazon will bring the same clothing to you?

Given Americans’ habits, I think Jeff Bezos is making a safe bet. However, Mr. Market disagrees with Jeff.

Is Ross Stores a good dividend stock?

I do not consider Ross Stores (NASDAQ: ROST) a good dividend stock despite 12 years of dividend growth. To clarify, I think the 25.5₵ dividend Ross paid on 11 September 2019 does not justify the $110.35 share price from 10 October 2019.

I believe Mr. Market overpriced Ross at $110.35 on 10 October 2019. However, Ross Stores’ dividend grew by 3₵ in 2019. In detail, Ross paid a 22.5₵ on 10 June 2019 and a 25.5₵ dividend on 10 September 2019.

Overall, credited Ross Stores with a dividend yield of 0.91%, an annualized payout of $1.02, and a payout ratio of 24.8% on 14 October 2019. Despite those numbers I’m bearish on Ross Stores.

Specifically, I do not think the dismal economy in America’s economy can sustain Ross’s growth. In addition, Ross Stores has too much exposure to Amazon for my price.

I recommend that investors be leery of Ross Stores (NASDAQ: ROST) because of Amazon and income inequality.  In conclusion, I think ROST is heading for a price collapse because Mr. Market overprices it.