Current Price: ~ $81/share
Projected Yield: ~ 1.10%
Ross Stores is the nation's second-largest off-price retailer of brand-name apparel and home accessories. The company operates about 990 Ross Dress for Less stores and roughly 70 dd's Discounts stores in the United States. Ross Dress for Less offers merchandise at prices that are 20%-60% below the regular prices of most department and specialty stores; dd's Discounts is a similar concept with lower-tier brands and prices that are 20% lower than those at Ross Dress for Less.
Projected Yield: ~ 1.10%
Ross Stores is the nation's second-largest off-price retailer of brand-name apparel and home accessories. The company operates about 990 Ross Dress for Less stores and roughly 70 dd's Discounts stores in the United States. Ross Dress for Less offers merchandise at prices that are 20%-60% below the regular prices of most department and specialty stores; dd's Discounts is a similar concept with lower-tier brands and prices that are 20% lower than those at Ross Dress for Less.
I estimated the firm's WACC today at 10.58% using the Capital Asset Pricing Model and the company's recent SEC filings.
Recent free cash flows and noted growth rates:
| Year | FCF $Millions |
| 2002 | 157 |
| 2003 | 199 |
| 2004 | 169 |
| 2005 | 149 |
| 2006 | 199 |
| 2007 | 283 |
| 2008 | 117 |
| 2009 | 359 |
| 2010 | 730 |
| 2011 | 474 |
| TTM | 292 |
Average Annual Growth FCF: ~ 32%
CAGR FCF: ~ 13%
Consensus Forecast Industry 5-Year Growth: ~ 15% per yearConsensus Forecast Company 5-Year Growth: ~ 12% per year
Scenario 1
Starting at $474 million FCF, assuming the company achieves a 5-year growth rate in FCF of 12% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:
Discounted Cash Flow Valuation
| Year | FCF $Millions |
| 0 | 474 |
| 1 | 531 |
| 2 | 595 |
| 3 | 666 |
| 4 | 746 |
| 5 | 835 |
| Terminal Value | 8839 |
The firm's future cash flows, discounted at a WACC of 10.58%, give a present value for the entire firm (Debt + Equity) of $7807 million. If the firm's fair value of debt is estimated at $173 million, then the fair value of the firm's equity could be $7634 million. $7634 million / 117 million outstanding shares is approximately $65 per share and a 20% margin of safety is $52/share.
Scenario 2
Starting at $474 million FCF, assuming the company achieves a 5-year growth rate in FCF of 12% per year, and then a growth rate in FCF of 2.75% per year forever:
Discounted Cash Flow Valuation
| Year | FCF $Millions |
| 0 | 474 |
| 1 | 531 |
| 2 | 595 |
| 3 | 666 |
| 4 | 746 |
| 5 | 835 |
| Terminal Value | 11941 |
The firm's future cash flows, discounted at a WACC of 10.58%, give a present value for the entire firm (Debt + Equity) of $9683 million. If the firm's fair value of debt is estimated at $173 million, then the fair value of the firm's equity could be $9510 million. $9510 million / 117 million outstanding shares is approximately $81 per share and a 20% margin of safety is $65/share.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
