The retail industry is a bustling and competitive world, shaped by endlessly shifting variables like consumer sentiment, spending habits, the broader economy, and market trends. In the current environment, with consumers juggling steep inflation and sky-high interest rates alongside the threat of a potential recession, many retailers are entering the historically critical fourth quarter on pins and needles.
However, as consumers look to trade down on basic necessities, discount retailers like Ross Stores Inc. (ROST) can be a solid choice for investors. And ROST has pulled back on the charts lately, presenting an attractive opportunity for investors eyeing this defensive Nasdaq-100 Index ($IUXX) name.
ROST’s Defensive Edge
ROST isn't your typical retail stock; it's a survivor in uncertain economic times. When folks start tightening their belts during economic uncertainty, they often trade down to discount retail, and that's where ROST shines. They've got a variety of goods – think clothing, accessories, home stuff, and beauty products – all priced 20% to 60% lower than what you'd find in those fancy department or specialty stores. It's a budget option that appeals to a wide range of customers, especially when money's tight.
In fact, according to data from Morningstar, during the 2008-2009 financial downturn, ROST still managed to grow comparable sales in each fiscal year by 2% and 6%, respectively. That's some serious resilience.
What's more, ROST isn't just surviving; it's thriving. It's been snatching up market share from rivals like Kohl's (KSS), which has grappled with falling sales and other challenges.
And here's the icing on the cake for investors – ROST has a track record of giving back to shareholders via dividends and share buybacks. Right now, they're dishing out an annual dividend of $1.32 per share, with a yield of 1.18%, and they're working on a $1.9 billion share repurchase program authorized last year.
Working Out of Oversold Status
Over the past 52 weeks, ROST has kept pace almost step for step with its parent index, the Nasdaq-100. Shares of the retailer are up 29% for the period, compared to a 30% gain for the index.
More recently, while ROST has pulled back from its late-summer highs, the stock has been outperforming. While the Nasdaq-100 is slightly negative over the last three months, ROST is up more than 3% for the period.
That said, after a well-received earnings report in mid-August, the stock sold off hard in September - so hard that its 14-day Relative Strength Index (RSI) dropped to about 25, well into oversold territory. While the shares have recovered from the worst of their lows, the stock still presents a potential buying opportunity.
Notably, ROST is still undervalued compared to its own historical averages. Its forward price/earnings ratio is 21.37, well below the metric's five-year average of 36.75. Similarly, the stock's price/book, price/sales, and price/cash flow ratios are all lower than their respective historical averages, indicating a possible bargain at current levels.
Earnings and Fundamentals
ROST has a financial track record that's pretty impressive, to say the least. They've been delivering strong earnings and solid fundamentals, showing off their competitive edge and knack for efficiency. In 2023, they've been beating the odds and surpassing analyst expectations.
Take the second quarter, for example. ROST raked in a cool $4.9 billion in revenue, marking a 13% increase from the same quarter in fiscal 2022. Earnings per share (EPS) of $1.32 represented a hefty 32% bump from the same quarter last year. Both figures topped Wall Street's expectations.
ROST could also be poised for a strong holiday quarter, if consensus forecasts play out. Analysts are eyeing an average earnings estimate of $1.61 per share for ROST in the fourth quarter, up about 23% year over year. Revenue is expected to hit $5.3 billion, a 6% boost compared to the same quarter in the previous year.
Analysts have an average price target of $129.42 for ROST, representing a 15% premium from current levels. The consensus rating is a “strong buy,” with 14 out of 18 analysts giving ROST their most bullish endorsement.
A Recession-Friendly Buy with Upside
In conclusion, if you're on the hunt for a recession-friendly stock pick, look no further than ROST. This defensive Nasdaq-100 stock has a proven track record of weathering economic storms and thriving when markets recover.
With impressive fundamentals, solid growth rates, and a compelling value proposition, ROST is positioned for success through the upcoming holiday season - a crucial period where the retail sector typically shines.
On the date of publication, Ebube Jones did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
