Last Thursday, Ross Stores (NASDAQ: ROST) posted solid sales results for the first quarter, along with earnings per share that beat management's forecast and analysts' expectations. In doing so, the off-price giant outperformed every major department store chain.
Nevertheless, Ross Stores continues to lag its larger rival TJX Companies (NYSE: TJX) in terms of comparable-store sales growth. Management acknowledges that the company's recent results haven't been up to par -- but expects performance to improve steadily in the quarters ahead, which could keep Ross Stores stock moving higher.
Sales growth slows
In early March, Ross Stores reported that comp sales rose 4% in the fourth quarter of fiscal 2018. During the earnings call, Ross Stores executives stated that growth could have been even stronger but for merchandise planning missteps in the ladies apparel business, which accounts for more than a quarter of the retailer's sales.
This headwind continued in the first quarter. Ross Stores' initial forecast called for comp sales growth to slow to a range of 0% to 2% in Q1. Ultimately, the company achieved a 2% comp, reaching the high end of its guidance range. However, that compares unfavorably to its 2018 results -- and Ross Stores typically surpasses the high end of its guidance range. This sales result was also much less impressive than the 5% comp sales gain that TJX posted last quarter.
Ross Stores reported a modest comp sales increase for the first quarter. Image source: Ross Stores.
On the bright side, earnings per share reached $1.15 in Q1, up from $1.11 a year earlier. This easily exceeded the company's official guidance of $1.05 to $1.11 and the analyst consensus of $1.12. Management did note that the timing of expenses during the year had boosted EPS by about $0.02 last quarter.
The full-year forecast inches up
Ross Stores executives have warned on the past two earnings calls that it would take a little while to fix the company's merchandise assortment in ladies apparel. That said, performance should improve at least a little bit in the second quarter. Management is projecting 1% to 2% comp sales growth for the coming quarter, which is better than its Q1 sales outlook was a few months back.
Earnings growth is on track to accelerate, as well. EPS should rise to between $1.06 and $1.11 this quarter, compared to $1.04 a year ago. Freight costs in particular are set to reverse from being a major headwind in the first quarter to being an earnings tailwind by the end of this year.
The modest earnings beat last quarter encouraged Ross Stores to boost its full-year outlook. The company now expects EPS to reach a range of $4.38 to $4.52: above its previous guidance of $4.30 to $4.50.
Ross Stores will get back to form
In the second half of 2017, TJX suffered from a merchandise planning misstep similar to the problem that Ross Stores is currently experiencing. As a result, it reported a subpar 2% comp sales increase for that year (TJX's fiscal 2018) as a whole. However, that just paved the way for a period of outperformance once the company had corrected its mistake. Last year, comp sales surged 6% at TJX.
Ross Stores should be able to achieve a similar rebound starting later this year, as it gets more appealing merchandise on its racks. Management also noted that the threat of a trade war with China is creating the kind of supply chain disruption that typically opens up attractive buying opportunities for off-price retailers like Ross Stores and TJX.
Meanwhile, the No. 2 off-price retailer managed to log a 5.8% increase in total sales last quarter, despite its merchandising mistakes. Many retailers would be thrilled with that kind of growth. This just shows how much potential Ross Stores has if it can get back to peak performance over the next few quarters.
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