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Ross Stores (ROST) Up 6.8% Since Last Earnings Report: Can It Continue?

Zacks Equity Research
·6 min read

It has been about a month since the last earnings report for Ross Stores (ROST). Shares have added about 6.8% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Ross Stores due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Ross Stores Q3 Earnings & Sales Top Estimates

Ross Stores reported improved trends in third-quarter fiscal 2020, resulting in better-than-expected top and bottom lines. Moreover, the company’s earnings improved year over year, while sales declined. Despite the decline, the quarter reflected improved sales trends on better merchandise assortments, a delayed back-to-school season, gains from larger markets and a return to normal store hours. Backed by the improved trends, the company’s sales reflected significant growth on a sequential basis.

However, costs related to COVID-19 and lower packaway levels remained concerning. During the quarter, the company incurred about $25 million of net COVID-19-related expenses. It notes that the impacts of these expenses were slightly higher on COGS than SG&A expenses. Moreover, the company expects the COVID-19-related expense to be relatively higher in the fiscal fourth quarter compared with the third quarter. The increase is mainly attributed to expenses for managing the impacts of industry-wide capacity constraints and congestion as well as wage and incentive actions in supply chain and stores. Meanwhile, packaway levels of 26% at the end of the fiscal third quarter were significantly below the prior-year quarter’s 39%.

Also, management noted that month-to-date comparable store sales in November declined in mid-single digits, reflecting a slow start to the fiscal fourth quarter. Moreover, it remains uncertain about the impacts of the upsurge of the pandemic on consumer demand during the highly competitive holiday shopping season. Driven by the lack of visibility and the pandemic-led disruptions, the company refrained from providing guidance for the fiscal fourth quarter.

Q3 Highlights

Ross Stores reported adjusted earnings of $1.02 per share, up nearly 1% from $1.03 per share reported in the prior-year quarter. Moreover, earnings beat the Zacks Consensus Estimate of 63 cents. Adjusted earnings excluded a one-time charge of 65 cents per share related to the refinancing of $775 million in senior notes to significantly reduce long-term debt costs.

Total sales declined 2.5% to $3,754.5 million but surpassed the Zacks Consensus Estimate of $3,464.5 million. Despite the adverse impacts of COVID-19, sales trends improved in the fiscal third quarter after a slow start in August. The accelerated trends were mainly attributed to better merchandise assortments, a late back-to-school season, robust performance in larger markets and the return of stores to more normal working hours. The significantly improved sales trends in the reported quarter reflected sequential improvements from the fiscal second quarter.

In the fiscal third quarter, the company witnessed the largest merchandise gains at Ross’ home category. Meanwhile, the Midwest and Southeast were the best performing geographic regions. Moreover, it witnessed accelerated gains at dd's DISCOUNTS’ value offerings during the reported quarter, owing to positive customer response. Overall, gains at the core business demonstrated consumers' continued focus on value and the company’s ability to deliver the value bargains to customers.

Notably, comparable store sales (comps) declined 3% in the fiscal third quarter, owing to the decrease in the number of transactions, offset by higher average basket size.

Cost of goods sold (COGS) declined about 2% to $2,711.4 million. As a percentage of sales, COGS increased 35 basis points (bps) year over year, driven by higher freight costs of 90 bps and distribution expenses of 70 bps. Higher costs more than offset the 190-bps increase in merchandise margin, owing to a favorable buying environment. Moreover, buying and occupancy costs increased 40 bps and 25 bps, respectively.

Selling, general and administrative (SG&A) expenses increased 45.2% to $877.9 million, while as a percentage of sales, it expanded 765 bps. SG&A expenses included the previously mentioned 640-bps impact of one-time debt refinancing charge. It also reflected deleveraging effects of lower comps and higher pandemic-related operating costs in fiscal 2020.

Operating margin of 4.4% declined significantly from 12.4% in the year-ago quarter. The decline was mainly due to one-time debt refinancing charges, which pulled down the operating margin by 640 basis points (bps). Additionally, operating margin was hurt by higher pandemic-related operating costs in fiscal 2020 and deleveraging of expenses throughout the business, owing to lower comps.

Store Update

During the quarter, the company opened 30 Ross and 9 dd’s DISCOUNTS stores. This marked the completion of its expansion program for fiscal 2020. As of Oct 31, 2020, consolidated inventories declined 25% from the prior year. Average store inventories were down 8%.

The company plans to close 10 existing stores in the fiscal fourth quarter. With this, it expects to end fiscal 2020 with 1,585 Ross and 274 dd’s DISCOUNTS stores. This will result in a net increase of 54 stores in fiscal 2020.

Financials

Ross Stores ended the quarter with cash and cash equivalents of $4,416.1 million, long-term debt of $2,512 million, and total shareholders’ equity of $3,019 million. Earlier, the company suspended the share repurchase program in light of the ongoing pandemic. Moving ahead, it does not intend to repurchase any shares for the rest of fiscal 2020.

Moreover, the company had liquidity of more than $5.2 billion at the end of the fiscal third quarter, which includes cash on hand and $800 million available under its revolving credit facility. During the fiscal third quarter, the company refinanced a portion of its senior notes, which significantly lowered the annual interest expenses and total cash outlays for long-term debts. Additionally, it undertook actions to reduce ongoing debt costs through the repayment of the $800-million revolving credit facility and terminating the undrawn $500-million revolver.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates review.

VGM Scores

At this time, Ross Stores has a great Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Ross Stores has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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