Stephen Dodson presented his in-depth investment thesis on Ross Stores (NASDAQ: ROST) at Wide-Moat Investing Summit 2014.
Ross Stores: One of two leading “off-price” apparel retailers (TJX main competitor), selling name-brand clothes for a lot less. Sources of moat: 1) scale advantages (apparel makers want to offload excess inventory quickly, to few buyers; SG&A as % of revenue almost half of competition) and 2) logistics (keep 1,300 stores fresh with varied inventory that turns quickly; complexity of managing 700 buyers negotiating with 8,000 vendors). What Walmart and Costco are in mainline retail, Ross and TJX are in apparel retail taking share from traditional department store competition such as Kohl’s, JC Penney, Macy’s (customers, as a whole, are choosing price over experience in apparel retail). Importantly, the likes of Amazon are not significant competition as it’s tough to match experience online (with average price per unit of $10 the shipping economics don’t work; brands don’t want to see their goods online at huge discounts; needle-in- a-haystack, tactile “treasure hunt” best in-person; only 60% of Ross’s transactions made with credit/debit card). Recent valuation (adjusted for cash, at 13.6x consensus 2015 EPS of $4.69) offers attractive returns with a flat multiple and no margin expansion due to a long compounding runway: can get to 2,500 stores, almost double today’s 1,300 (TJX has 3,300) by expanding in the Northeast and Midwest. Ross is one of the rare businesses that can grow rapidly while distributing most of its earnings to shareholders (little capex required for growth; shares have declined by 30% in past 10 years).
About the instructor:
Stephen Dodson founded the Bretton Fund in 2010 and serves as its president and portfolio manager. Most recently, Stephen served as president of Parnassus Investments, which was founded in 1984 and manages the Parnassus Funds, a family of mutual funds for individual and institutional investors. Stephen was with Parnassus from 2002 to 2008 and served in a number of areas within the firm, including chief operating officer, portfolio manager, and chief compliance officer. In 2008, Institutional Investor News named him one of the 20 Rising Stars of Mutual Funds. He is a board member of the philanthropy group Full Circle Fund, serving on its executive committee, and has led projects for education reform in California. Prior to Parnassus, he worked for the venture capital group of Advent International, a private equity firm, and was an investment banker for Morgan Stanley in New York and Menlo Park. He holds a BS in business administration from the University of California, Berkeley.
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