Ross Stores (NASDAQ: ROST) Is a Good Recovery Play

While luxury retail names like Macy’s (NYSE: M), Ralph Lauren (NYSE: RL), and Kohl’s (NYSE: KSS) watch their shares languish near multi-year if not all-time lows, shares of discount department store Ross Stores (NASDAQ: ROST) continue to undo Q1’s damage.

They mightn’t have fully recovered from the four-week-long 55% drop through last March, but they’re also not a tech stock and are mostly brick and mortar based so must be cut some slack in light of the pandemic. Shares are still up a full 70% from Q1’s low and back trading where they were a year ago. In the past three months, they’ve managed to consolidate around a new range which is important as investors size up their near term and long term outlook.

And with a 20% rally under their belt in the past month alone, it looks like these investors are shaping up for a solid earnings report this coming Thursday. They’ll be watching closely to see just how much of a once-off May’s Q1 report was, with its 50% year on year drop in revenue making from grim reading at the time.

Fresh Upgrade

But the bulls received a new and late addition to their camp on Monday this week when Telsey Advisory Group upped the stock to an Outperform rating from Market Perform. Analyst Dana Telsey is bullish on the company’s reputation for low price, discounted retail brands helping to protect sales from any tightening in consumer spending.

In a note to clients, she said "while the impact of COVID-19 abruptly changed the direction of the company's sales and earnings dramatically (and similarly to that of other discretionary retailers) heading into 2020, we believe Ross Stores' cautious approach to running its business and strong financial position (~$3B in liquidity as of 1Q20) will be even more prevalent in providing its pathway to the other side, while a wide door of market share opportunities arise from the reopening of its retail stores across the U.S. and bankruptcies of department and specialty stores".

This is the kind of thinking that investors will have been chewing on as they hope for last quarter’s seismic drop in revenue to be very much a once-off. To be fair, it can for the most part be put down to the fact that all 1,800 Ross stores were shut as non-essential businesses for at least half the quarter and as compounded by the fact that the company doesn’t have a strong e-commerce business. This latter point has been the saving grace if not the makings of companies like Wayfair (NYSE: W) who were able to quickly pivot and take advantage of the shift to e-commerce.

30 Years Of Profits

But investors will take comfort from the fact that last quarter’s report was the company’s first quarterly loss in over 30 years and that most of their stores have reopened since. While this week’s report is expected to show another print in red, it’s clear the company is not in the habit of losing money.

Those thinking about getting involved should consider the long term play and the engine that was able to keep Wall Street happy for 120 consecutive quarters. As economies continue to reopen and hopes build for a vaccine, there’s every reason to think Ross will soon be back to winning ways.

There’s a solid support line around the $80 mark with June’s post-COVID high of $105 providing the big target for shares to aim for. Since 2016, shares have gone through multiple dips of 20% or more and have always come out stronger. While last quarter’s drop certainly stretched that range, recent performance as well as history is on the side of the bulls.