Hurricane Harvey May Have Been A Tailwind For Ross Stores

This year’s extreme hurricane season proved disruptive to southern brick-and-mortar businesses, damaging some locations and forcing temporary closures of others.

With about 7 percent of its stores in Harvey-impacted areas, Ross Stores, Inc. ROST isn’t immune to injury ━ but it should turn out all right in the long run. In fact, JPMorgan expects the discount retailer to post storm-related gains driven by full-price distributors’ failure to clear inventory.

“ROST cited that stores historically experience a post-hurricane bump with disruption in the broader retail supply chain resulting in order cancellations/excess product, which provides compelling buying opportunities for the off-price business model over time,” analysts Matthew Boss and Steven Zaccone wrote in a recent note.

The analysts upgraded the stock to Overweight with a $74 price target.

Other Catalysts

JPMorgan foresees continued market share gains from industrywide consolidation of brick-and-mortar stores and Ross’ position to capitalize on changing fashion trends. The firm boasts a diverse vendor base with no single brand contributing more than 3 percent of sales.

At the same time, Ross sees a favorable field of competition and registers no threat from the imposing Amazon.com, Inc. AMZN, which leadership considers more comparable to full-price department stores.

“ROST’s pricing proposition stands 20 to 60 percent below both AMZN and department stores on average with its constantly changing mix and zero private label exposure providing assortment flexibility,” Boss and Zaccone wrote.

JPMorgan’s positive thesis also accounts for:

• Store expansion from 1,598 stores in 37 states to 2,500 stores nationwide.
• Guidance for multi-year double-digit earnings-per-share growth driven by inventory reduction, payroll management and shrink improvement.
• And an expected $2.3 billion in excess cash available to shareholders by 2019 based on execution of a buyback plan and dividend payout.

At the time of writing, Ross was trading up 3 percent.

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