ONE LEVEL DEEPER
ROST
Warren Buffett frameworkThe Owner-OperatorBenjamin Graham frameworkThe Value ArchitectMichael Mauboussin frameworkThe Expectations EngineerHoward Marks frameworkThe Cycle WhispererPeter Lynch frameworkThe Everyday Edge

At 4.54% implied growth versus 7.7% trailing, Ross faces expectations below reality — yet still trades 73.2% above DCF value.

cautiousLeaning Bearishconviction

Ross trades at expectations that defy its own base rates — the market prices 4.54% perpetual growth into a company destroying value at peak earnings.

THE LENSES
THE EXPECTATIONS GAPstretched

What expectations are embedded in the price, and are they reasonable?

Reverse DCF implies 4.54% perpetual growth versus 7.7% trailing growth
Price sits 73.2% above DCF valuation of $127 at $220
P/E of 23.35x in 63rd percentile despite earnings at 98th percentile
Earnings yield of 1.07% versus 4.33% treasury yield creates -326bp spread

This framework sees expectations moderating from recent performance but still optimistic. The market expects Ross to sustain mid-single digit growth forever while accepting a massive negative spread to risk-free rates — pricing faith over fundamentals.

Expectations Gap: DCF vs Market
DCF FAIR VALUE
$127
73% premium
MARKET PRICE
$220
Price implies 4.5% growth · Trailing: 7.7%
ROIC VS COST OF CAPITALdestructive

Is the company creating or destroying value?

ROIC of 5.19% trails WACC of 7.79% by 260 basis points in Q1'26
ROE declined from 47.4% in Q3'25 to 41.9% in Q1'26
Operating income grew 25.5% on 18.5% revenue growth showing leverage

Applying this lens reveals value destruction despite record profitability. The negative ROIC-WACC spread means each dollar invested destroys 26 cents of value — a critical finding when the market prices growth.

ROIC vs Cost of Capital
BASE RATES AND EXCEPTIONSvulnerable

Does this company have structural reasons to defy mean reversion?

Operating margins stable at 12.3% in Q1'26 versus 12.4% in Q1'25
Gross margins consistent around 27-28% over multiple quarters
Revenue concentration moderate with no segment exceeding 26%
Off-price model provides structural cost advantage versus full-price retail

This framework finds stable margins and the off-price business model provide some structural advantages. However, with profitability metrics at 98th percentile, base rates strongly favor mean reversion from these extremes.

Operating Margin
SKILL VS LUCKskilled

Are the results driven by management skill or favorable conditions?

94.7% earnings beat rate over 38 quarters demonstrates consistency
Double beats rewarded +2.14% while double misses punished -22.77%
Revenue correlation of 0.853 with CPI shows macro dependency
EPS grew 27.0% in Q1'26 while revenue grew only 7.7%

The framework sees mostly skill in execution consistency but questions sustainability when earnings grow 3.5x faster than revenue. High macro correlations suggest favorable conditions amplified results.

Earnings Surprises
KEY NUMBERS
VERDICT

Applying the Mauboussin framework reveals a fundamental disconnect: Ross achieves peak operational performance while destroying value on a ROIC basis. The market prices 4.54% perpetual growth into a business whose returns trail its cost of capital by 260 basis points. With earnings metrics at the 98th percentile and base rates favoring reversion, this framework suggests the expectations gap has turned negative. Can operational excellence overcome the gravity of capital efficiency?

This analysis applies Michael Mauboussin's published investment framework to publicly available financial data. It is not authored by, endorsed by, or affiliated with Michael Mauboussin. Educational purposes only. Not financial advice.

OTHER PERSPECTIVES
Warren Buffett framework
The Owner-Operator
Leaning Bullish
Peter Lynch framework
The Everyday Edge
Leaning Bullish
Benjamin Graham framework
The Value Architect
Leaning Bearish
Howard Marks framework
The Cycle Whisperer
Bearish
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