Ross EPS In Line, Revs Beat

Zacks

Ross Stores Inc. (ROST), one of the leading off-price retailers of apparels and home accessories, recently posted earnings of 72 cents per share for third-quarter 2012, in line with the Zacks Consensus Estimate.

The quarterly results grew 14% from the prior-year level of 63 cents a share, primarily attributable to the company's ability to attract bargain hunters who value both quality and price. The company’s efforts to trim down costs and reduce store inventories also benefitted the results.

Let’s Dig Deep

Net sales for the quarter increased 11% to $2.263 billion from $2.046 billion in the prior-year quarter. This also surpassed the Zacks Consensus Estimate of $2.261 billion. Comparable store sales surged 6% during the period.

Gross profit, in dollar terms, increased 10.3% to $613.7 million from $556.2 million in the year-ago quarter. However, gross profit margin contracted 6 basis points year over year to 27.12% from 27.18% reported in the year-ago quarter, primarily due to higher cost of goods sold as a percentage of sales.

Leverage on operating expenses and rise in sales led to a 14.2% increase in operating income to $255.7 million from the prior-year level of $224.0 million. Consequently, operating margin for the quarter expanded 35 basis points to 11.30%.

Other Financial Aspects

Ross Stores, which faces stiff competition from Kohl's Corporation (KSS) and Wal-Mart Stores Inc. (WMT) ended the quarter with cash and cash equivalents of $623.8 million compared with $552.9 million at the end of the prior-year quarter.

During the first nine months of fiscal 2012, Ross generated $646.3 million of cash from its operational activities. This will enable the company to make capital investments, pay dividends and repurchase shares. At the end of the quarter, the company had a long-term debt of $150.0 million and shareholders' equity of $1.698 billion.

During the first nine months, the company bought back 5.4 million shares for $334 million under its existing $900 million share repurchase program, which was authorized last year. The company has completed its first stage of the program by buying back $450 million of shares during fiscal 2011. Now, the company plans to repurchase $450 million worth of shares in fiscal 2012.

Guidance

For the fourth quarter of fiscal 2012, the company expects same-store sales to increase 1% to 2%. Earnings per share, for the fourth quarter, are expected in the range of $0.99 - $1.04.

Our Take

Ross Stores and its subsidiaries operate two chains of off-price retail apparel and home accessories stores in the United States. These stores offer branded apparel, shoes, and accessories, as well as gift items, linens, and other home-related merchandise. The company also offers small furniture and furniture accents, educational toys and games, luggage, gourmet food and cookware, watches, sporting goods, and fine jewelry, which provide it with a competitive edge over its rivals.

Ross Stores has implemented a micro-merchandising tool, through which it expects to enhance total sales and profitability by targeting expansion in existing markets. Moreover, Ross remains focused on new store growth, share buybacks, and has the financial strength to continue building shareholders' value.

Currently, Ross Stores holds a Zacks #2 Rank, which translates into a short-term Buy rating. However, we remain slightly cautious over the stock due to sluggish economic recovery, and therefore maintain a long-term Neutral recommendation.

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