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Ross Stores (ROST) Q4 Earnings Beat, Stock Dips on Soft View

Zacks Equity Research

Ross Stores, Inc. ROST has reported strong fourth-quarter fiscal 2018 results, wherein top and bottom lines beat estimates and improved year over year. However, the company’s operating profit margin continued to be impacted by higher freight costs and wage-related investments.

Notably, higher freight costs have been a headwind for the company for over a year now. Moreover, Ross Stores expects headwinds related to higher freight costs to persist in fiscal 2019.

Further, Ross Stores expects to witness difficult sales and earnings comparisons with fiscal 2018. Additionally, it expects the retail environment to remain extremely competitive, along with an uncertain macro-economic and political backdrop. Consequently, it provided a soft view for the first quarter and fiscal 2019.

This led shares of Ross Stores to decline 3.2% in the after-hours session. However, this Zacks Rank #3 (Hold) stock has surged 20.2% in the past three months, outperforming the industry’s 7.4% growth.



Guidance

Ross Stores expects the recent softness in the ladies apparel business to have a bearing on comps results for the fiscal first quarter. As a result, it anticipates comps to be flat to up 2% in the fiscal first quarter. Total sales are estimated to increase 3-6%. Operating margin is projected at 13.4-13.8% compared with 15.1% in the prior-year quarter.

This decline is likely to result from expectations of adverse impacts of the timing of pack-away related expenses, which benefited earnings in the prior-year quarter. Higher freight and wage costs are also likely to contribute to the decline.

Consequently, the company envisions earnings per share of $1.05-$1.11 compared with $1.11 recorded in the prior-year quarter.

For fiscal 2019, the company estimates comps growth of 1-2%. It recorded an increase of 4% in the prior year. Total sales are expected to increase 5-6% in fiscal 2019. Operating margin is estimated to be 13.2-13.4%, down from 13.6% reported in fiscal 2018. The decline is likely to stem from expectations of flat gross margin and some expense deleverage. Earnings per share are anticipated to be $4.30-$4.50, marking an increase from $4.26 in fiscal 2018.

Moreover, the company expects capital expenditure of $600 million for fiscal 2019, including initial investments for new distribution center.

Q4 Highlights

Ross Store posted earnings of $1.20 per share, which beat the Zacks Consensus Estimate of $1.14 and surpassed the company’s guidance of $1.09-$1.14. Further, earnings increased nearly 1% from $1.19 reported in the prior-year period. This year-over-year increase came despite the contribution of 10 cents per share from the additional week in fourth-quarter fiscal 2017.

Ross Stores, Inc. Price, Consensus and EPS Surprise

Ross Stores, Inc. Price, Consensus and EPS Surprise | Ross Stores, Inc. Quote


Total sales rose about 1% to $4,107.4 million and beat the Zacks Consensus Estimate of $4,055 million. Though sales were above the company’s expectations, it was partly impacted by the additional 53rd week in fiscal 2017, which contributed about $219 million to sales. Additionally, softness in the ladies apparel business during the holiday season impacted sales.

Comparable-store sales (comps) improved 4% on the back of increased traffic and rise in the size of the average basket. Comps also surpassed the company’s guidance of 1-2% rise. Further, comps gained from strength in the men’s category, offset by softness in ladies apparel. Further, Southeast and Midwest were the best performing regions.

Cost of goods sold (COGS) increased 2.3% to $2,898.7 million. As a percentage of sales, COGS improved 55 basis points (bps) due to higher freight costs, distribution expenses, and buying and occupancy costs, partly offset by increase in merchandise margins. Selling, general and administrative expenses increased 4.1% to $576 million and 30 bps as a percentage of sales, owing to higher wages.

Operating margin of 13.2% in the reported quarter reflected a decline of about 135 bps from the prior-year quarter. Though operating margin was above the company’s expectation, the contraction is attributed to gain of 70 bps from the additional week in fourth-quarter fiscal 2017 as well as increased freight costs and wage-related investments.

Store Update

As of Feb 2, 2019, Ross Stores operated 1,717 outlets — including 1,480 Ross Dress for Less stores and 237 dd's DISCOUNTS stores.

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

Financials

Ross Stores ended fiscal 2018 with cash and cash equivalents of $1,412.9 million, long-term debt of $312.4 million, and total shareholders’ equity of $3,305.7 million.

During fiscal 2018, the company bought back 12.5 million shares for $1,075 million. In the fiscal fourth quarter, it repurchased 3.1 million shares for nearly $268 million, completing its previous authorization.

Backed by its balance sheet strength, and ability to generate cash for funding growth and other capital needs, Ross Stores authorized a new share repurchase program for the next two years and also raised the quarterly dividend rate.

Under the new share-repurchase program, the company intends to buy back shares worth nearly $2.55 billion in the next two fiscal years. This represents 8% rise in the company’s market value and 31% hike from the share buyback authorization of $1.95 billion in the previous two fiscal years. The previous share buyback authorization  was completed in January 2019.

Additionally, it approved a quarterly cash dividend of 25.5 cents per share, reflecting a 13% increase from the prior dividend rate of 22.5 cents. The increased dividend is payable on Mar 29 to shareholders of record as of Mar 18.

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