Ross Stores (ROST)

During the current recession, consumers are turning to budget and discount retailers for everyday household necessities. As a discount retailer of apparel, ROST benefits from the consumer trade down effect during this economic downturn. In Q3 2008 (ended Nov. 3, 2008), ROST saw net earnings rise 17.7% to $57.3 million when compared to the prior-year quarter. Sales rose by 6%, and same-store sales were up 3%, same as that of the prior-year quarter.

TJX Companies, the owner of retail stores like T.J. Maxx and Marshalls, is the largest off-price retailer in the world generating $20.2 billion in sales in 2009. Ross Stores, is the second largest generating $7.2 billion during the same period. Despite being nearly 3 times smaller than TJX, ROST's margins and financial health beat that of TJX. In terms of debt, ROST has $5 in cash for every $1 in debt, whereas TJX only has $2. ROST's cash flow over the last 12 months was $4.69 in operating cash for every $1 in capital spending, whereas TJX's was just $3.76. And despite generating nearly twice as much profit as ROST, both companies have nearly identical operating margins. What does this say about ROST? We'll they're doing something right nonetheless. The company's net revenue has more than tripled over the last 10 years, which has helped the company's stock. The 10-year return for ROST is 22% while just 14.9% for TJX.

As a off-price retailer, ROST gets its clothing from other retailers that could not sell them. In the poor retail climate of 2009, ROST stands to pick up more clothing from failing retailers. With more selection in its stores, ROST stands to gain more sales from this increased selection.