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Ross Stores, Inc. (ROST): Wedgewood Capital Believes Firm Has Insulated Itself from Amazon Threat

Wedgewood Capital is bullish on off-price retailing giant Ross Stores, Inc. (NASDAQ:ROST). The hedge fund believes that the company has been performing well, thanks to its differentiated model. The investor also believes that Ross Stores – as well as its other retail holdings – has insulated itself from the Amazon threat by having “a deliberate brick-and-mortar footprint” and focusing on “niche segments.” In its 2017 Q3 investor letter (you can download a copy here), Wedgewood Capital discussed its investment thesis on Ross Stores as well as on off-price retail. Should you follow smart money into Ross Stores Inc. (ROST)?

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Photo Credit: Wavebreakmedia/Shutterstock.com

Here is everything that Wedgewood Capital said about Ross Stores:

It seems that nearly every quarter, a new headline makes its way to the forefront, declaring that brick and mortar retailing is dead – or at least on its death bed. The ongoing evolution and disruption of the retail market resulting from increased e-commerce assumes the impact is far-reaching, affecting all physical retailers.  Here at Wedgewood, we perform our due diligence to determine the accuracy of these threats. Over time, we have studied the threat of e-commerce (Amazon in particular) quite thoroughly.  What we find, and what our analysis leading up to our initial purchases indicated, is that our companies have differentiated models and/or operate in niche segments, allowing them to grow despite these threats. We wrote at length last quarter about the Amazon threat and clarified why we believe our retail holdings have insulated themselves from this threat.  We invite you to return to that letter for a refresher whenever dour headlines raise concerns about this topic.

Both TJX Companies and Ross Stores have a very deliberate brick and mortar footprint. In fact, Ross has stated on public investor calls that they have no plans to pursue an e-commerce format. Their model, which we believe to be one of their competitive advantages, is successful despite the misconception that e-commerce means the end of all brick and mortar. Ross management has explained how the transaction economics of the shopping experience Ross provides simply would not work online. 90% of their products are priced under $30, with the average unit retail closer to $10. With online retail, product return rates are substantially higher than for in-store purchases. In addition, by the time products are returned, they are potentially out of season. Add on to this the fact that these online sales are likely being offered with free shipping. The culmination of all of these factors, means that providing the value experience Ross offers would not be sustainable in an e-commerce format. To be profitable, online retail pricing is much more in line with that of department stores. This allows Ross to offer the same value proposition – delivering more for less – as usual, successfully.

We added to our position in Ross in the quarter as the Company continues to grow same-store sales and improve margins. Further, valuation levels were very attractive as we saw the stock price trade down during the quarter with the previously mentioned general concerns in the retail space. The Company plans to open 80-90 new stores each year in new and existing markets, providing a long path for growth that offers a differentiated retail model that insulates them from the disruption we are seeing with many standard brick and mortar retailers.

Ross Stores, Inc. (NASDAQ:ROST) is also a popular stock among the hedge funds we track at Insider Monkey. There were 29 funds in our database with bullish positions in the off-price retailing giant at the end of the second quarter. Renaissance Technologies and Marshall Wace LLP are the largest shareholders of the company among the funds in our database.

Headquartered in Dublin, California, Ross Stores, Inc. (NASDAQ:ROST) operates Ross Dress for Less, which is deemed to be the largest off-price apparel and home fashion chain in the U.S. with over 1,300 locations in 37 states, the District of Columbia and Guam. Shares of Ross Stores are down 1.66% so far this year. However, the stock has gained more than 21% during the last three months, mainly due to strong the second-quarter financial results, beating Wall Street expectations. Earnings per share for the second quarter were $0.82, versus $0.71 last year. The company earned a profit of $317 million, up from $282 million in the prior year, while its sales increased 8% to $3.43 billion. Analysts had expected EPS of $0.76 on sales of $3.37 billion.

Ross Stores is one of the 10 biggest companies that support Trump. According to our research, the biggest companies supporting Trump are mostly retailers since they carry many of the family’s brand-name goods.

Meanwhile, you will love to read our articles discussing Wedgewood Capital’s investment thesis on Alphabet, Cognizant Technology Solutions, Fastenal, Qualcomm, PayPal, Tractor Supply Company, TreeHouse Foods, and Verisk Analytics.