Ross Stores, Inc. (ROST), Foot Locker, Inc. (FL): 2 Financially Strong Retailers To Buy Now

Is the U.S. retail industry healing? Opinions vary. Statistics provided by the International Council of Shopping Centers, or ICSC, claimed that April retail sales rose 2.7% year-over-year, while the National Retail Federation (NRF) found that sales increased 4.6% year-over-year in that same time period. NRF CEO Matt Shay opined that:

“The slow road to recovery is turning into a sprint as retailers experienced a nice bounce in April… But maintaining this sales momentum will be challenging. Until our economy begins to create jobs and reduce unemployment, the breadth and sustainability of this recovery remains uncertain.”

Adverse weather was also cited as a detriment to April’s retail numbers. Retail seems to be inching along slowly, with some promise of a pick-up in the future.

Below are two financially strong retailers, however, that are attractively priced now and can also weather the storm until retail fully recovers. These two companies are also increasing sales and earnings as well.

Does “dress for less” lead to success?

A leader in off-price retail apparel and home fashion, Ross Stores, Inc. (NASDAQ:ROST) operates stores under the Ross Dress for Less and dd’s DISCOUNTS brand names in the United States. As of May 4, it operated 1,112 store locations in 33 states, the District of Columbia, and Guam.

Ross Stores, Inc. (NASDAQ:ROST)

After recently reporting on May 23, earnings for Ross were inline with expectations, but on a more encouraging note, they also managed to top revenues. Increasing sales were also accompanied by increasing margins. Margins edged up to 14.9% from 14.4% last year.

Ross Stores, Inc. (NASDAQ:ROST), in fact, has been increasing revenues and earnings for the better part of a decade:

Ross Stores also sport a rock solid balance sheet as well:

The company looks a little expensive when looking at its price in relation to trailing earnings, with a P/E of around 18, but earnings are also expected to continue to grow– giving Ross Stores, Inc. (NASDAQ:ROST) a more reasonable forward P/E of about 15.

Ross Stores, Inc. (NASDAQ:ROST) also pays a dividend that yields about 1%, which isn’t much, but the company has also been consistently raising their dividend for the past ten years as well, which is promising:

A discounted athletic apparel and footwear retailer…

Another solid retailer is Foot Locker, Inc. (NYSE:FL). After reporting record net income of $138 million for its first quarter (up 8% year-over-year), Foot Locker, Inc. (NYSE:FL) also saw its first quarter year-over-year sales increase. Quarterly same-stores sales also increased by a little over 5% as well, which is a good sign for the sports and footwear retailer.

While both revenues and earnings have been a little rocky over the last ten years, they have also been steadily increasing as of late:

Footlocker also boasts a strong balance sheet as well:

As can be seen, like Ross, Foot Locker is in great shape financially with more cash than debt and a strong balance sheet.

The company is also cheap at current levels, trading at only around 13 times trailing earnings and about 11 times forward earnings. To top it all off, Foot Locker, Inc. (NYSE:FL) also pays a dividend that yields around 2.40%– a dividend that they have slowly increased over the past decade.

Foot Locker also appears to offer more value than its closest competitor, Finish Line Inc (NASDAQ:FINL), as well. Finish Line reported disappointing earnings in April, with adjusted earnings per share falling about 6% year-over-year. Sales also fell around 3% for the quarter, while Finish Line’s gross margin shrunk 210 basis points year over year to 35.1%.

Finish Line expects both earnings and sales to grow in fiscal for fiscal 2014, but also anticipates continued negative pressure to be put on sales into the first quarter of 2014. The first quarter of 2014 will also mark increasing expenses as the company inherited the athletic footwear inventory at all Macy’s, Inc. (NYSE:M) stores, which will likely also put a drag on margins in the
near term, as well.

The partnership with Macy’s is also expected to increase sales long-term once everything is settled– which translates to $250 million to $350 million in annual sales, or 30—35 cents per share in earnings “once the initiative takes momentum”, according to Zack’s Equity Research. Six months into the partnership, Macy’s seems to love the licensing deal, with the company’s CFO, Karen Hoguet explaining that:

“If you think about it, they have access to shoes that we couldn’t get as Macy’s… It’s obviously greatly enhancing our assortments, which as you know is the key in our mind to being successful in retail. Also, they have a great selling model, which I think will also benefit us.”

It will be interesting to see how the new licensing partnership affects Finish Line’s numbers as well when they next report on June 24.

Foot Locker and Ross Stores, Inc. (NASDAQ:ROSThave some nice things going for them. Besides being rock-solid financially and rewarding to shareholders with their dividend increases, both company’s have been increasing earnings and revenues even in a tough retail environment. They should pick-up even more steam if and when retail finally comes back around full steam. Both Ross and Foot Locker, Inc. (NYSE:FL) shares are a good pickup at current levels.

Joseph Harry has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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