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Here's Why Ross Stores is Likely to Retain its Momentum

Zacks Equity Research

Discount store retailer, Ross Stores Inc.’s ROST niche position in the market augurs well for growth, which in turn makes it a reliable bet. The company is gaining from effective merchandising initiatives, store growth potential and strong earnings trend. Further, Ross Stores’ proven off-price business model makes its stores attractive destinations for customers in all economic scenarios.

This has largely aided the stock’s robust performance, which has grown 1.5% year to date and a solid 13.6% in the past one year. Moreover, the stock has outperformed the Zacks categorized Retail – Discount Stores industry that has declined 1.1% year to date and 4.2% in the last one year. Let’s find out more.



What’s Behind the Solid Momentum?

Ross Stores’ key strategy to keep itself on growth trajectory is consistent focus on merchandising organization through investments in workforce, processes and technology. Also, management continually fine tunes and upgrades processes to boost productivity. Moreover, the company constantly organizes merchant group, which enables it to steadily expand market coverage in the vendor community, while improving relationships with a broad network of existing and new resources. These initiatives strengthen Ross Stores’ buying operations, facilitating customers to purchase on-trend merchandise at attractive prices.

We also applaud Ross Store’s ability to run the business with leaner inventory levels and faster inventory turnover. The company remains focused on cutting down inventories at stores to the optimum level, while making available the right assortments at the right store at the right time. Lower inventory should aid Ross Store’s strong merchandise margins and ability to continue capitalizing on in-season inventory buying opportunities in the marketplace. The company has managed to reduce in-store inventories by over 40% in the last several years, consequently boosting sales and gross margins.

The company also remains on track with store expansion program as evident from the introduction of 28 new stores in February and early March, including 23 Ross Dress For Less and five dd's DISCOUNTS stores. While this marked the completion of the company’s store opening target for fiscal first-quarter 2017, it also reflected a significant progress on its plan to open about 90 stores (70 Ross and 20 dd’s DISCOUNTS) in fiscal 2017. Such actions make us confident of the company’s growth potential and its ability to successfully attain the target of expanding store count to 2,500 in the long term.

Further, Ross Stores has a splendid earnings surprise history. The company has delivered a positive earnings surprise in 10 of the past 11 quarters, with an average beat of 4.8% in the trailing four quarters. Earnings have been gaining from the favorable response of value-focused customers to Ross Stores’ extensive collection of brand bargains and solid cost controls. In the most recent quarter, the top line and bottom line beat stemmed from impressive dd’s DISCOUNT performance as customers favorably responded to improved merchandise, along with gains in the shoes and men's categories.

Ross Stores, Inc. Price, Consensus and EPS Surprise

 

Ross Stores, Inc. Price, Consensus and EPS Surprise | Ross Stores, Inc. Quote

However, challenges related to strong comparisons amid macroeconomic uncertainty and a volatile retail landscape, led to a cautious outlook for fiscal 2017. Despite the soft outlook, the Zacks Consensus Estimate for fiscal 2017 witnessed an uptrend in the last 30 days, rising 2 cents to $3.14 per share.

Further, the current Zacks Consensus Estimate of 80 cents per share for first-quarter fiscal 2017 reflects 9% growth from the prior-year quarter. Analysts polled by Zacks expect revenues of $3.28 billion for the fiscal first quarter, reflecting nearly 6.2% growth from the year-ago quarter.

Will this Momentum Last?

While the cautious forward view is disheartening, we believe the company has consistently provided cautious outlooks and beaten them in the past. Further, the company’s growth initiatives and store growth plans indicate that there is no reason for a breakdown in this momentum. Additionally, the company’s Momentum Score of “A” justifies our view that its momentum will last.

Zacks Rank & Key Picks

Ross Stores currently carries a Zacks Rank #3 (Hold). Better-ranked stocks include Burlington Stores Inc. BURL, Foot Locker Inc. FL and Steven Madden, Ltd. SHOO, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Burlington Stores, with a long-term earnings growth rate of 15.9%, has jumped nearly 15.3% year to date.

Foot Locker has grown nearly 6.3% year to date. The stock has a long-term EPS growth rate of 9.7%.

Steven Madden, with a long-term earnings growth rate of 12%, has advanced 7.6% year to date.

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