L Brands (LB) & Ross Stores (NASDAQ:ROST) Critical Analysis

L Brands (NYSE: LB) and Ross Stores (NASDAQ:ROST) are both large-cap retail/wholesale companies, but which is the superior investment? We will contrast the two companies based on the strength of their valuation, earnings, analyst recommendations, dividends, risk, profitability and institutional ownership.

Dividends

L Brands pays an annual dividend of $2.40 per share and has a dividend yield of 5.4%. Ross Stores pays an annual dividend of $0.64 per share and has a dividend yield of 1.0%. L Brands pays out 70.4% of its earnings in the form of a dividend. Ross Stores pays out 21.1% of its earnings in the form of a dividend. Both companies have healthy payout ratios and should be able to cover their dividend payments with earnings for the next several years. L Brands has raised its dividend for 10 consecutive years and Ross Stores has raised its dividend for 6 consecutive years. L Brands is clearly the better dividend stock, given its higher yield and longer track record of dividend growth.

Valuation and Earnings

This table compares L Brands and Ross Stores’ gross revenue, earnings per share (EPS) and valuation.

Gross Revenue Price/Sales Ratio EBITDA Earnings Per Share Price/Earnings Ratio
L Brands $12.26 billion 1.02 $2.34 billion $3.41 12.97
Ross Stores $13.33 billion 1.86 $2.19 billion $3.03 21.21

L Brands has higher revenue, but lower earnings than Ross Stores. L Brands is trading at a lower price-to-earnings ratio than Ross Stores, indicating that it is currently the more affordable of the two stocks.

Profitability

This table compares L Brands and Ross Stores’ net margins, return on equity and return on assets.

Net Margins Return on Equity Return on Assets
L Brands 8.04% -103.18% 12.00%
Ross Stores 8.87% 42.95% 21.77%

Analyst Ratings

This is a summary of recent recommendations for L Brands and Ross Stores, as reported by MarketBeat.com.

Sell Ratings Hold Ratings Buy Ratings Strong Buy Ratings Rating Score
L Brands 4 17 9 0 2.17
Ross Stores 0 7 13 0 2.65

L Brands currently has a consensus price target of $46.50, suggesting a potential upside of 5.13%. Ross Stores has a consensus price target of $70.71, suggesting a potential upside of 10.01%. Given Ross Stores’ stronger consensus rating and higher probable upside, analysts plainly believe Ross Stores is more favorable than L Brands.

Volatility and Risk

L Brands has a beta of 0.68, indicating that its share price is 32% less volatile than the S&P 500. Comparatively, Ross Stores has a beta of 1.14, indicating that its share price is 14% more volatile than the S&P 500.

Institutional and Insider Ownership

79.4% of L Brands shares are owned by institutional investors. Comparatively, 90.4% of Ross Stores shares are owned by institutional investors. 16.7% of L Brands shares are owned by insiders. Comparatively, 2.3% of Ross Stores shares are owned by insiders. Strong institutional ownership is an indication that endowments, large money managers and hedge funds believe a company will outperform the market over the long term.

Summary

Ross Stores beats L Brands on 12 of the 17 factors compared between the two stocks.

L Brands Company Profile

L Brands, Inc. operates specialty retail business. The Company is focused on women’s intimate and other apparel, personal care, beauty and home fragrance categories. Its segments include Victoria’s Secret, Bath & Body Works, and Victoria’s Secret and Bath & Body Works International. It sells its merchandise through company-owned specialty retail stores in the United States, Canada, the United Kingdom and Greater China, which are mall-based; through Websites, and through international franchise, license and wholesale partners. It operates in the retail brands, which include Victoria’s Secret, PINK, Bath & Body Works and La Senza. La Senza is a specialty retailer of women’s intimate apparel. It sells its La Senza products at over 120 La Senza stores in Canada. Henri Bendel sells handbags, jewelry and other accessory products through New York and 28 other stores. Mast Global is a merchandise sourcing and production function serving the Company and its international partners.

Ross Stores Company Profile

Ross Stores, Inc. and its subsidiaries operate two brands of off-price retail apparel and home fashion stores-Ross Dress for Less (Ross) and dd’s DISCOUNTS. The Company is the off-price apparel and home fashion chain in the United States, with 1,340 locations in 36 states, the District of Columbia and Guam, as of January 28, 2017. The Company offers in-season, name brand and designer apparel, accessories, footwear, and home fashions for the entire family at savings of 20% to 60% off department and specialty store regular prices every day. The Company also operated 193 dd’s DISCOUNTS stores in 15 states as of January 28, 2017. As of January 28, 2017, the Company operated a total of 1,533 stores consisted of 1,340 Ross stores and 193 dd’s DISCOUNTS stores. As of January 28, 2017, the Company owned and operated six distribution processing facilities-three in California, one in Pennsylvania, and two in South Carolina.

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