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Ross' EPS Meets, Guides Up

Zacks Equity Research

Ross Stores Inc. (ROST), one of the leading off-price retailers of apparels and home accessories, recently posted earnings of 81 cents per share for second-quarter 2012, in line with the Zacks Consensus Estimate. The quarterly results grew 27% from the prior-year level of 64 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 12% to $2,340.9 million from $2,089.4 million in the prior-year quarter. This also surpassed the Zacks Consensus Estimate of $2,332.0 million. Comparable store sales increased 7% during the period.

Gross profit, in dollar terms, increased 15.2% to $651.2 million from $565.1 million in the year-ago quarter primarily due to lower cost of goods sold as a percentage of sales. Consequently, gross profit margin expanded 80 basis points year over year to 27.8% from 27.0% reported in the year-ago quarter.

Increased merchandise gross profit, leverage on operating expenses and rise in comparable store sales led to a 12.8% increase in operating income to $297.0 million from the prior-year level of $241.6 million. Consequently, operating margin for the quarter expanded 110 basis points to 14.4%.

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 $721.0 million compared with $512.7 million at the end of the prior-year quarter. During the first six months of fiscal 2012, Ross generated $504.2 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 $1,664.2 million.

During the first six months, the company bought back 3.7 million shares for $224 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.


Buoyed by strong results in the second quarter, Ross Stores increased its guidance for fiscal 2012. The company expects earnings per share in the range of $3.36 - $3.44 compared with the earlier guidance of $3.26 - $3.37, and represents 14% to 17% year-over-year growth. The current Zacks Consensus Estimate stands at $3.45 per share for fiscal 2012.

For the third quarter of fiscal 2012, the company expects same-store sales to increase 3% to 4%. Earnings per share, for the third quarter, are expected in the range of 63 cents - 66 cents. The current Zacks Consensus Estimate for third quarter 2012 is 70 cents per share.

Moreover, the company revealed fourth-quarter outlook with earnings per share in the range of 99 cents to $1.04, and same-store sales increase of 1% to 2%.

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 for the entire family, 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, we have a long-term ‘Neutral’ recommendation on the stock. Moreover, Ross Stores holds a Zacks #2 Rank, which translates into a short-term Buy rating.

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