Ross Stores (ROST) Q3 Earnings & Sales Beat, Decline Y/Y
Ross Stores, Inc. ROST reported solid third-quarter fiscal 2022 results, wherein the top and bottom lines beat the Zacks Consensus Estimate. However, both metrics declined year over year. Results were hurt by the ongoing inflationary pressure and an increasing promotional retail environment. However, lower incentive costs and eased domestic freight expenses aided results to some extent.
Ross Stores’ earnings of $1.00 per share beat the Zacks Consensus Estimate of 81 cents but declined 8.3% from $1.09 reported in the third quarter of fiscal 2021.
Total sales of $4,565.5 million dropped 0.2% year over year but surpassed the Zacks Consensus Estimate of $4,364 million. In third-quarter fiscal 2022, comps declined 3% against comps growth of 14% in the year-ago quarter. Comps benefited from higher average basket size, offset by a year-over-year decline in traffic. However, traffic trends improved from the second quarter of fiscal 2022.
In the quarter, the shoes category remained the key growth driver, with Florida and Texas being the top-performing regions. Sales trends continued to improve at the dd’s DISCOUNTS format from the first half. However, dd’s DISCOUNTS’ sales continued to trail Ross’s due to ongoing inflationary pressures, which have a greater impact of dd’s low-income customers.
Shares of the Zacks Rank #3 (Hold) company have gained 7.6% in the past three months against the industry’s decline of 0.5%.
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Q3 Insights
The cost of goods sold (COGS) of $3,424 million increased 2.9% year over year. As a percentage of sales, COGS was 75%, marking a year-over-year increase of 230 basis points (bps) due to lower merchandise margins, unfavorable timing of packaway-related costs and increased markdowns. The merchandise margin declined 165 bps in the quarter due to higher markdowns.
Distribution costs escalated 140 bps, owing to unfavorable timing of pack-away-related expenses and deleverage from its new distribution center. However, higher expenses were somewhat offset by a 20-bps occupancy deleverage and a 75-bps decline in buying costs. Additionally, costs were offset by the easing of pressures from domestic freight expenses in the fiscal third quarter, which improved 20 bps due to the lapse of elevated freight costs period which began in the second half of fiscal 2021.
Selling, general and administrative (SG&A) expenses of $693.4 million declined 4.5% year over year. SG&A, as a percentage of sales, contracted 70 bps year over year to 15.2%. The decrease resulted from lower incentive costs, which more than offset the deleveraging effect of lower comps.
The operating margin of 9.8% declined 160 bps from 11.4% in third-quarter fiscal 2021. The decline can be attributed to the deleveraging effect of the comps decline, higher markdowns and unfavorable timing of packaway-related costs.
Ross Stores, Inc. Price, Consensus and EPS Surprise
Ross Stores, Inc. price-consensus-eps-surprise-chart | Ross Stores, Inc. Quote
Store Update
In third-quarter fiscal 2022, the company completed its store expansion target for fiscal 2022, with the opening of 28 Ross stores and 12 dd’s DISCOUNTS stores. In fiscal 2022, ROST opened 91 stores, comprising 71 Ross stores and 28 dd’s DISCOUNTS stores. The company earlier anticipated closing 10 older stores in fiscal 2022.
The company expects to end fiscal 2022 with 1,693 Ross stores and 322 dd’s DISCOUNTS stores, marking a net increase of 92 stores. As of Sep 30, 2022, Ross Stores operated 2,019 outlets, including 1,696 Ross stores across 40 states, the District of Columbia and Guam, and 323 dd’s DISCOUNTS stores in 21 states.
Financials
Ross Stores ended third-quarter fiscal 2022 with cash and cash equivalents of $3,906.5 million, long-term debt of $2,455.5 million, and total shareholders’ equity of $4,147 million.
As of the end of the fiscal third quarter, consolidated inventories increased 11.8% from the 2021 comparable period, reflecting a significant moderation from the first half of fiscal 2022. Average store inventory increased 4% in the quarter, down from the pre-pandemic levels. Pack-away merchandise levels were 41% of the total inventories compared with 31% at the end of third-quarter fiscal 2021.
The company bought back 2.8 million shares of common stock for $244 million in the fiscal third quarter. ROST remains on track to repurchase $950 million under its existing $1.9-billion share repurchase plan, which remains valid till fiscal 2023.
Concurrent with the earnings release, Ross Stores declared a regular quarterly cash dividend of 31 cents per share, payable Dec 30, 2022, to shareholders of record as of Dec 6, 2022.
Outlook
Going into the fiscal fourth quarter, the company anticipates the highly promotional holiday selling season and ongoing inflationary headwinds to put pressure on low-to-moderate income customers. Given the third-quarter sales momentum and improved assortments for the holiday season, the company raised its guidance for fourth-quarter fiscal 2022. Further, it expects the easiest sales and earnings comparisons for the fiscal fourth quarter.
For fourth-quarter fiscal 2022, the company expects comps to be flat to down 2%, whereas it reported 9% comps growth in the prior-year quarter. Earlier, it anticipated fiscal fourth-quarter comps to decline 4-7% year over year.
Earnings per share are envisioned to be $1.13-$1.26 for the fiscal fourth quarter compared with the $1.04-$1.21 mentioned earlier. The company reported earnings of $1.04 per share in the year-ago quarter.
The earnings view for the fiscal fourth quarter is based on sales of flat to up 3% and the operating margin of 9.7% to 10.5%. The company reported an operating margin of 9.8% in the year-ago quarter. The operating margin view reflects gains due to the easing of significant cost pressures from ocean freight and lower incentives in the prior-year quarter, offset by the deleveraging effects of lower comps, unfavorable timing of pack-away-related costs and higher markdowns.
The company anticipates a net interest income of $14 million for the fiscal fourth quarter. The tax rate is anticipated to be 23%, while shares outstanding are expected to be 342 million.
Based on the year-to-date results and the fiscal fourth-quarter guidance, the company envisions earnings per share of $4.21-$4.34 for fiscal 2022. This marks an increase from the prior view of $3.84-$4.12. Notably, it reported $4.87 in fiscal 2021.
Stocks to Consider
Here are three better-ranked stocks to consider — Tecnoglass TGLS, Dollar General DG and GMS Inc. GMS.
Tecnoglass, which is engaged in manufacturing and selling architectural glass and windows, and aluminum products for the residential and commercial construction industries, currently flaunts a Zacks Rank #1 (Strong Buy). TGLS has a trailing four-quarter earnings surprise of 26.9%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Tecnoglass’ current financial-year sales and EPS suggests growth of 40.5% and 76.4%, respectively, from the year-ago period’s reported figures.
Dollar General, a discount retailer, currently carries a Zacks Rank #2 (Buy). DG has an expected EPS growth rate of 11.1% for three to five years.
The Zacks Consensus Estimate for Dollar General’s current financial-year revenues and EPS suggests growth of 10.8% and 13.8%, respectively, from the year-ago reported figures. Dollar General has a trailing four-quarter earnings surprise of 2.2%, on average.
GMS, a distributor of wallboard and suspended ceiling systems, currently carries a Zacks Rank #2. GMS has a trailing four-quarter earnings surprise of 10.8%, on average.
The Zacks Consensus Estimate for GMS’ current financial-year revenues and EPS suggests growth of 10.8% and 10.2%, respectively, from the year-ago reported figures.
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