Impact of a 1% Sales Tax Hike in CA

A 1% boost in sales tax in CA is a double-edged –sword. Here’s an overview of those most heavily exposed. ROST is a name I keep coming back to where risk increasingly outweighs reward.

For those not watching the financial disaster unravel in California with Schwarzenegger’s budget impasse, keep in mind that the current proposal includes a 1% increase in sales tax, which is not particularly welcomed by the retailers. Sadly, 1% is probably better than the state going bankrupt, government payrolls shutting down, and the regional economy contracting further.

The chart below outlines retailers with the greatest percent of their respective store base located in California. The one that stands out for me is Ross Stores. It is overexposed to CA, is in a space that I increasingly do not like (off price channel), is near peak margins, has two more quarters until inventory, GM and SG&A compares become very difficult, sentiment is generally positive, and is trading at a 30%+ premium to the group. I still think it is too early to get super negative on this name – but the fundamental cards are starting to line up.