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Ross Stores (ROST) Down 2.5% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

It has been about a month since the last earnings report for Ross Stores (ROST). Shares have lost about 2.5% in that time frame, underperforming the S&P 500.

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

Ross Stores Q2 Earnings Beat, Tariffs Hurt FY19 View

Ross Stores reported strong second-quarter fiscal 2019 results, wherein earnings and sales beat estimates. Further, the company’s operating profit margin benefited from the timing of expenses in the reported quarter.

Q2 Highlights

Ross Stores posted earnings of $1.14 per share, which beat the Zacks Consensus Estimate of $1.12 and surpassed the company’s guidance of $1.06-$1.11. Further, earnings grew nearly 9.6% from $1.04 reported in the prior-year period. Earnings mainly gained from favorable timing of expenses to the tune of nearly 2 cents per share, which are likely to reverse in the second half of fiscal 2019.

Total sales rose 6.5% to $3,979.9 million and also surpassed the Zacks Consensus Estimate of $3,971 million. Comparable-store sales (comps) improved 3% on slightly higher traffic and increased average basket size. The higher basket size included benefits of increased units per transaction, offset by slightly lower average unit retail (AUR). Comps also outpaced the company’s guidance of 1-2%.

Comps gained from strength in the men’s category, and in the Midwest and Southeast regions. However, the ladies apparel category continued to remain a headwind for comps growth. Nonetheless, management notes that the ladies business witnessed slight improvement in the quarter. The company also remains confident that the initiatives undertaken for this category will drive additional gains through the rest of the fiscal year.

Cost of goods sold (COGS) rose 6.6% to $2,843.9 million. As a percentage of sales, COGS grew 10 bps due to higher freight costs of 20 bps and occupancy deleverage of 20 bps, which offset the benefits of lower distribution expenses and rise in merchandise margins of 10 bps each. Meanwhile, buying costs remained flat. Selling, general and administrative expenses rose 6.7% to $592 million and 5 bps as a percentage of sales, owing to higher wages.
 
Operating margin of 13.7% was better than expected, driven by the aforementioned benefit of the timing of expenses that might reverse in the second half.

Store Update

The company successfully reached its target of opening 28 stores in the fiscal second quarter, which included 22 Ross Dress for Less stores and 6 dd's DISCOUNTS stores. As of Aug 3, 2019, Ross Stores operated 1,772 outlets — including 1,523 Ross Dress for Less stores and 249 dd's DISCOUNTS stores.

In the fiscal third quarter, the company expects to open 42 stores, including 30 Ross and 12 dd’s DISCOUNTS stores. In fiscal 2019, it anticipates opening 100 stores, including 75 Ross Dress for Less and 25 dd’s DISCOUNTS outlets. This does not include the company’s planned closure or relocation of nearly 10 older stores.

Financials

Ross Stores ended the fiscal second quarter with cash and cash equivalents of $1,382 million, long-term debt of $312.7 million, and total shareholders’ equity of $3,296.3 million.

In the reported quarter, the company repurchased 3.2 million shares for nearly $320 million. This brings the total share repurchases for the first half to 6.6 million for about $640 million. With this, the company remains on track to repurchase shares worth $1.275 billion in fiscal 2019.

Guidance

Going into the second half of fiscal 2019, the company anticipates results to bear impacts of the recent announcement of 10% tariff on goods imported from China, including apparel and footwear. As already stated, driven by these impacts, Ross Stores cut on its earnings view for fiscal 2019 and provided a soft outlook for the second half. Earnings per share for fiscal 2019 are now expected to be $4.41-$4.50, whereas it reported $4.26 in fiscal 2018. Earlier, it projected earnings per share of $4.38-$4.52 for fiscal 2019.

Based on the impacts of tariffs, the company expects earnings per share of 92-96 cents for the fiscal third quarter and $1.20-$1.25 for the fourth quarter, whereas it earned 91 cents and $1.20 in the respective year-ago periods. However, the company reiterated its sales and comp forecasts for the second half.

Consequently, the company continues to anticipate comp growth of 1-2% for the third and fourth quarters of fiscal 2019. Other assumptions for the fiscal third quarter include rise of 5-6% in total sales. Operating margin is projected at 11.8-12%, whereas the company recorded 12.4% in the prior-year quarter. The soft operating margin view resulted from expectations of some pressure on gross margin from tariffs as well as deleverage on occupancy and other expenses, based on the current comps projections.

Moreover, the company estimates net interest income of $3.3 million in the fiscal third quarter, with a tax rate of 24%.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month.

VGM Scores

At this time, Ross Stores has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision has been net zero. 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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