Image via Michael Rivera/Wikimedia

Ross Stores (ROST) opened its first outlet in San Bruno, California in 1950; thirty-five years later, the chain has expanded to 1,363 stores in 37 states with sales approaching $13 billion, observes Ingrid Hendershot, money manager and editor of Hendershot Investments.

The company’s focus has been on bringing customers a constant stream of high-quality department and specialty store brands at extraordinary savings.

As a leading off-price retail chain, Ross is able to negotiate the best deals for the top brands and latest fashions from their 8,000 vendors. The company is able to provide additional value to their customers and their bottom line by offering a no-frills shopping experience with low-cost displays and fixtures.

In 2004, Ross Stores launched dd’s DISCOUNTS, which targets customers from households with more moderate income compared to Ross customers.

Ross is highly profitable with a stylish fiscal 2016 return on shareholders’ equity of 42.8% and a trendy 44.3% average return on equity during the last five years. Net profit margins have steadily expanded over the last five years from 8.1% to 8.7% in 2016.

The consistent long-term profitability showcases management’s ability to navigate a challenging retail environment amid wage inflation headwinds.

Ross Stores has generated steady sales and EPS growth over the last five years with growth compounding at 7% and 12% annual rates, respectively.

In fiscal 2016, 87 new stores were opened and same-store sales increased 4%, contributing to 8% total revenue growth for the year.

Ross was able to grow sales despite a difficult retail landscape. Revenue growth for fiscal 2017 is expected to be in the high single-digit range with 90 new stores expected to open.

In fiscal 2017, Ross plans to allocate $400 million of capital to open the new stores and enhance existing stores, distribution, transportation and information systems.

Management’s long-term strategy is to grow its store base from its current 1,363 stores to 2,500 stores based on their proven ability to cluster stores closer together and fully saturate existing and new markets.

Free cash flow for fiscal 2016 was $1.3 billion up more than 30% over the prior year with a four-year compounded annual growth rate of 23%. Ross Stores ended 2016 with $1.1 billion of cash and short-term investments and $396 million of long-term debt on its thrifty balance sheet.

The company completed a two-year $1.4 billion share repurchase program during 2016. In February 2017, the board approved a two-year $1.75 billion stock repurchase program for fiscal 2017 and 2018.

At the same time, the board approved a 19% increase in the cash dividend to an annualized $0.64 per share. This marks the 23rd consecutive annual dividend increase, reflecting management’s confidence in future growth prospects and a continued commitment to enhancing shareholder value.

Long-term investors seeking to outfit their portfolio with a high-quality market leader with outstanding profitability, steady growth and strong cash flows should consider adding Ross Stores to their shopping list. Buy.

Ingrid Hendershot, CFA, is founder and president of Hendershot Investments, Inc., an investment management firm established in 1994.

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