Is Ross Stores the Best Counter-Cyclical Stock to Buy?

In the ever-evolving landscape of retail, investors are constantly on the lookout for stocks that can weather economic storms and deliver consistent returns. Ross Stores (ROST) has long been a favorite among those seeking counter-cyclical investments, but is it still the best bet? Let's dive into the data to find out.

Strong Financial Performance

Ross Stores has shown impressive financial performance, particularly in terms of profitability. With a net profit margin of 9.89%, the company is outperforming many of its peers. This high margin indicates that Ross Stores is efficient in its operations and can generate significant profits from its sales. Additionally, the company's return on equity (ROE) of 40.28% is exceptionally high, suggesting that it is effectively using its equity to generate profits.

Earnings Growth

While Ross Stores' profitability is strong, its earnings growth has been somewhat lackluster compared to its competitors. The company reported an 11.83% year-over-year increase in earnings per share (EPS) for the fiscal year ended February 1, 2025. In contrast, The TJX Companies reported a 30.56% increase in earnings for the year ending January 31, 2025, and Burlington Stores saw a 46.58% increase. This disparity in earnings growth is a point to consider for investors looking for rapid expansion.

Market Share and Competitive Positioning

Ross Stores holds a significant market share within the retail apparel industry, standing at 17.47% as of Q3 2024. This positions the company as a major player, but it also faces stiff competition from The TJX Companies, which holds a 42.88% market share. Ross Stores' strategic investments in its merchandising organization and its ability to offer significant discounts on brand name merchandise have helped it maintain a competitive edge. However, the company's total return of -1.29% over the past 12 months, compared to the S&P 500's 22.28%, indicates that it has underperformed relative to the broader market.



Dividend and Shareholder Returns

Ross Stores pays a modest dividend yield of 1.24%, which is sustainable with a payout ratio of 25.63%. This indicates that the company is committed to returning value to shareholders, although the yield is lower than some of its competitors. The TJX Companies, for example, offers a dividend yield of 1.47%. Ross Stores' total return over the past three years is 52.42%, and over the past five years is 26.07%, showing that the company has performed well over the long term despite recent fluctuations.

Debt Levels and Financial Health

Ross Stores has a debt-to-equity ratio of 1.03, which is relatively low and indicates a healthy capital structure. However, this ratio is higher than that of its competitors, The TJX Companies (0.35) and Burlington Stores (0.87). While Ross Stores' debt levels are manageable, investors should keep an eye on this metric as it could impact the company's financial flexibility in the future.

Conclusion

Ross Stores presents a compelling case as a counter-cyclical stock with its strong profitability and efficient use of equity. However, its earnings growth and dividend yield are areas where it lags behind competitors. Investors should weigh these factors carefully and consider Ross Stores as part of a diversified portfolio, rather than a standalone investment. The company's strategic investments and operational efficiency position it well within the competitive landscape of the retail apparel industry, but it will need to address its earnings growth to maintain its status as a top counter-cyclical stock.