Off-price apparel and furnishings retailer Ross Stores (Nasdaq:ROST) reported impressive results on March 17 for its fourth quarter and full-year earnings. As its resounding quarter shows, the company continues to perform well.

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Continued Strong Growth
Ross Stores reported net income up 13% for the quarter, with earnings per share up 18%. Net earnings grew 25% for the full year while EPS was up 31%. These gains were on top of large increases the previous year. Same store sales for the fourth quarter grew 4%, on top of 10% growth in 2009. For the full year, comparables rose 5%, following a 6% increase the prior year. The company benefited from its position as a value retailer but also from strong execution.

For the full year, operating margin increased 140 basis points to a record 11.5%, while EBIT for the fourth quarter grew 60 basis points to 12.3% of sales. Sales increased 8% to $2.145 billion for the quarter, and increased by 9% for the year, to $7.866 billion. The company had strong top line growth was driven by brisk sales, reduced costs overall, as well as much lower inventory levels.

Concerns Over Profit Level Sustainability
Some investors worry whether Ross Stores, along with TJX Companies (NYSE:TJX), will be able to sustain this kind of growth. Off-price retailing has done well throughout the recession, but there are concerns now about consumers trading up. As the economy improves, consumers may return to competitors such as Macy's (NYSE:M), JC Penney (NYSE:JCP) or Dillard's Department Stores (NYSE:DDS). Ross Stores maintains its growth is sustainable, though the pace of growth may moderate.

Another concern expressed by analysts was over the packaway inventory. Packaway inventory is when off-price retailers buy a supply of seasonal branded merchandise at the end of a season at a discount, then store this until the next year's season. These can be judicious buys if the merchandise sells well the subsequent year, but can be a drag on operations if it doesn't.

Ross Stores' total inventory climbed 25% in the fourth quarter versus sales increases of 8%. Packaway inventory made up 47% of total inventory and has grown. So far, the Ross Stores has done well turning this packaway around. Management has achieved a record level of operating profitability, which it believes is sustainable.

Ross Stores Prospects
Ross Stores repurchased $375 million shares of its stock and has authorized a new $900 million share buyback program. The company raised its quarterly dividend 37.5%. It has cash and equivalents of $833.9 million, with long-term debt of $150 million. Fourth quarter operating cash flow was $673 million.

The Bottom Line
The company forecasts a comparable-store sales increase of 1 to 2% for fiscal 2011 with an EPS increase of 6 to 10% from $4.63 in 2010 to $4.90 to $5.10 in 2011. Ross Stores has carved a strong niche for itself and should continue to packaway profits. (Financial discipline is the key to successful growth in the retail industry. Check out The 4 R's Of Investing In Retail.)

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