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Ross Stores Inc. ROST has always been in investors’ good books, given its off-price business model, which attracts value-focused consumers. Additionally, its efforts to expand the store base and enhance offerings have been fruitful. In first-quarter fiscal 2021, the company benefited from increased customer demand, accelerated vaccination, government stimulus payments and the easing of COVID-19 restrictions.
The company reported better-than-expected earnings and sales results for first-quarter fiscal 2021. Also, earnings and sales improved 17% and 145% year over year, respectively. Notably, year-over-year growth stemmed from the easing of COVID-19 restrictions, which caused consumers to increasingly venture out to stores. This compared with the extended store closures in spring 2020 due to the pandemic that resulted in almost zero revenues in the latter part of first-quarter fiscal 2020.
Additionally, the company witnessed increased consumer demand trends, resulting in robust earnings and sales growth compared with the first quarter of fiscal 2019, which denotes the pre-pandemic levels. Given the extended store closures and COVID-related disruptions throughout 2020, the company states that the first quarter of fiscal 2019 represents a more relevant basis for comparison.
Now let us discuss at length why you should hold on to the leading off-price apparel and home accessories retailer stock.
We suggest holding on to the Ross Stores stock, given the potential in its business model as the economy reopens. The company remains poised to witness improved sales trends, owing to the acceleration in traffic trends. Going forward, it expects the tailwinds from increased consumer demand and the return of consumers to stores for shopping to aid sales trends through the rest of the year.
Also, Ross Stores has been consistent with the execution of its store expansion plans over the years. The company’s store expansion efforts are focused on continually increasing penetration in the existing as well as new markets. It opened four Ross Dress for Less and three dd’s DISCOUNTS stores in the first quarter of fiscal 2021. The conservative store openings in the fiscal first quarter and a cautious view for fiscal 2021 were set in 2020 amid the pandemic when it was impossible to predict as to when the health crisis will subside.
The company expects to open 30 stores in the fiscal second quarter, comprising 22 Ross and eight dd's DISCOUNTS. Ross Stores reiterated its store-opening plan for fiscal 2021, anticipating 60 new locations, including 40 Ross Dress for Less and 20 dd’s DISCOUNTS stores. Also, it plans to shut down or relocate nearly 10 older stores. However, for fiscal 2022, the company expects to return to its usual store expansion program, with plans to open about 100 stores.
As of May 21, 2021, the company operated 1,589 Ross stores across 40 states, the District of Columbia and Guam as well as 277 dd’s DISCOUNTS stores in 21 states. Earlier, it projected to expand the Ross chain of stores to 2,400 locations alongside operating about 600 dd’s DISCOUNTS stores over the long term.
Additionally, the company is well-placed to benefit from its inventory-management efforts, which led to lower inventory levels at the end of first-quarter fiscal 2021. Notably, consolidated inventories declined 6% at the end of the fiscal first quarter compared with the comparable fiscal 2019 levels. Packaway levels were at 34% compared with 44% in first-quarter fiscal 2019. Further, average selling store inventories were down 1% from first-quarter fiscal 2019.
Shares of the Zacks Rank #3 (Hold) company have gained 31.5% in the past year compared with the industry’s growth of 37.1%. This can be attributed to headwinds related to higher COVID-related costs, which have been hurting performance to some extent.
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Ross Stores has been witnessing costs related to COVID-19 for some time now. In the fiscal first quarter, net COVID-related expenses were about 35 basis points (bps) of sales. The majority of the expenses impacted SG&A expenses, which mainly included higher operating expenses associated with the pandemic-related cleaning protocols and higher incentive costs. Notably, COGS were also impacted by an increase in freight costs, driven by industry-wide supply-chain congestions, a rise in distribution expenses on higher wages and elevated buying costs.
The company anticipates higher freight costs, increased wages and elevated COVID-related costs to continue hurting operating margin through the rest of fiscal 2021. Consequently, the company’s operating margin view for the second quarter and fiscal 2021 are softer when compared with the respective fiscal 2019 periods. Notably, it expects COVID-related expenses to mar the operating margin by 100 bps in the fiscal second quarter as it returns to the pre-pandemic store operating standards, while continuing to maintain many of the additional cleaning routines.
Also, Ross Stores provided a cautious view for the second quarter and fiscal 2021 as it expects sales growth to slow down as the federal stimulus programs wind down. For the fiscal second quarter, the company anticipates comps growth of 5-7% from that reported in second-quarter fiscal 2019. Sales are projected to increase 9-12% in the fiscal second quarter. Operating margin is anticipated to be 9.2-9.9% compared with 13.7% reported in second-quarter fiscal 2019. Moreover, earnings per share are expected to be 80-89 cents, suggesting a decline from $1.14 reported in second-quarter fiscal 2019.
For fiscal 2021, the company expects comps growth of 7-9% from the fiscal 2019 reported levels, with sales expected to increase 11-13%. Operating margin is anticipated to be 10.7-11.2%, whereas it reported 13.4% in fiscal 2019. Earnings per share for fiscal 2021 are expected to be $3.93-$4.20, suggesting a decline from $4.60 reported in fiscal 2019.
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