Ross Stores, Inc. (ROST) currently operates Ross Dress for Less, an off-price apparel and home fashion chain in the U.S. with 1,629 locations in 40 states, the District of Columbia and Guam, notes Ingrid Hendershot, a value-oriented money manager and editor of Hendershot Investments.

Ross offers first-quality, in-season, name brand and designer apparel, accessories, footwear and home fashions for the entire family at savings of 20% to 60% off department and specialty store regular prices every day. Ross also operates 295 dd’s DISCOUNTS stores in 21 states.

The company’s focus has been on bringing customers a constant stream of high-quality department and specialty store brands at extraordinary savings. The rapidly changing merchandise, with shipments typically arriving three to six times per week, provides the customer a “treasure hunt” shopping experience with the core customer returning two to three times per month.

As a leading off-price retail chain, Ross is able to negotiate the best deals for the top brands and latest fashions from their many 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.

Ross Stores has a highly profitable business model that generated an average return on shareholders’ equity of 47.5% in the four years prior to the pandemic, which closed its stores in 2020 for an extended period of time. Profitability is rebounding in 2021 toward historical levels with the reopening of the economy.

The consistent long-term profitability of the firm showcases management’s ability to navigate challenging retail environments amid inflationary headwinds.

Ross Stores reported third quarter sales increased 22% to $4.5 billion with net earnings and EPS jumping approximately 190% to $385 million and $1.09, respectively. Comparable store sales were up 14% for the fiscal quarter.

Year-to-date, Ross generated free cash flow of $1.1 billion. During the quarter, the company repurchased $241 million of its common stock at an average price of $114.76 per share. The company remains on track to buy back a total of $560 million in common stock during fiscal 2021. Ross Stores ended the quarter with $5.2 billion in cash and cash equivalents, $2.4 billion in long-term debt and $3.9 billion in shareholders’ equity.

Ross Stores suspended the dividend during the pandemic to prudently conserve cash flow while stores were closed. As stores reopened, Ross resumed its dividend thanks to its strong cash flows and increased the 2021 dividend to $1.14 per share, representing a 16% annual growth rate over the last five years.

Management has been conservative with their financial outlooks. While hoping to do better, Ross is currently projecting fourth quarter comparable store sales gains of 7% to 9% and earnings per share in the range of $0.83 to $0.93. Based on the year-to date results and updated fourth quarter guidance, Ross is now planning earnings per share for fiscal 2021 to be in the range of $4.65 to $4.75 on a comparable store sales gain of 12% to 13%.

Long-term investors shopping for a bargain stocking stuffer should consider Ross Stores, a high-quality company with profitable operations and strong cash flows. Buy.

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