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Ross Stores (ROST) Shares Rise as Q4 Earnings Beat Estimates

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Ross Stores, Inc. ROST reported mixed results for fourth-quarter fiscal 2021, wherein the bottom line beat the Zacks Consensus Estimate, while the top line missed the same. Meanwhile, earnings declined year over year and sales improved from the prior year. ROST provided a two-year comparison for all metrics as the pre-pandemic period reflects a more precise comparison base due to the closure of stores through most of fiscal 2020.

Management also outlined its view for fiscal 2021 and the first quarter. Also, it revised its long-term store growth targets, given the increased store closures and bankruptcies in recent years. The company also provided an upbeat view for fiscal 2023 and beyond.

The Ross Stores stock rallied 9.1% in the after-hours trading session on Mar 1, driven by the bottom-line beat in the fourth quarter of fiscal 2021 and the upbeat long-term targets. Shares of the Zacks Rank #4 (Sell) company have lost 11.4% in the past three months compared with the industry’s decline of 8.2%.

Zacks Investment Research
Zacks Investment Research


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Q4 Insights

Ross Stores reported earnings of $1.04 per share, down 18.8% from $1.28 reported in the fourth quarter of fiscal 2020. However, the figure surpassed the Zacks Consensus Estimate of 97 cents. Results benefited from strong customer demand during the holiday season, which aided sales, offset by the negative impacts of the surge in Omicron cases during the peak holiday selling period and continued supply-chain congestions. Cost pressures related to freight, wages and COVID-19 hurt the margins and the bottom line.

Total sales of $5,020.6 million improved 18.1% year over year but missed the Zacks Consensus Estimate of $5,031 million. Sales benefited from broad-based growth across certain merchandise categories and regions, as well as robust comparable store sales (comps). The children and men's categories performed well in the holiday selling period, and the Midwest and Southeast regions were the outperforming regions. Sales trends were also robust at the dd's DISCOUNTS business.

In fourth-quarter fiscal 2021, comps increased 9% from fourth-quarter fiscal 2019, owing to higher average basket size, partly offset by a decline in transactions.

Cost of goods sold (COGS) of $3,773.6 million increased 19.5% year over year and 17% from the level in fourth-quarter fiscal 2019. As a percentage of sales, COGS was 75.2%, an increase of 90 basis points (bps) year over year and 210 bps from fourth-quarter fiscal 2019. Domestic freight expenses rose 100 bps and distribution costs increased 70 bps, mainly on the ongoing supply-chain headwinds and higher wages. We note that elevated ocean freight costs hurt merchandise margins that declined 50 bps, while buying costs increased 20 bps. However, higher expenses were somewhat offset by occupancy leverage of 30 bps on higher sales volume.

Selling, general and administrative (SG&A) expenses of $755.9 million increased 9.5% year over year and 25.6% from the fourth-quarter fiscal 2019. SG&A, as a percentage of sales, declined 120 bps year over year and increased 140 bps from the pre-pandemic levels to 15.1%. The increase from the pre-pandemic levels resulted from higher holiday-related pay incentives, as well as elevated wages and COVID-19 costs. Ross Stores recorded net COVID-related expenses of roughly 35 bps in the fourth quarter, which had a greater impact on SG&A expenses than COGS.

The operating margin of 9.8% declined 350 bps from fourth-quarter fiscal 2019. The decline can be attributed to the aforementioned expense-related headwinds despite robust top-line growth.

Ross Stores, Inc. Price, Consensus and EPS Surprise

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

Ross Stores, Inc. price-consensus-eps-surprise-chart | Ross Stores, Inc. Quote

Store Update

As of Jan 29, 2022, Ross Stores operated 1,923 outlets, including 1,628 Ross stores across 40 states, the District of Columbia and Guam, as well as 295 dd’s DISCOUNTS stores in 21 states.

The company plans to open 30 stores in first-quarter fiscal 2022, comprising 22 Ross and eight dd's DISCOUNTS. For the fiscal year, the company expects to return to normal store opening targets, with plans to open 100 stores. This will include 75 Ross and 25 dd's DISCOUNTS stores. Additionally, it anticipates closing 10 older stores in fiscal 2022.

Given the large retail closures and bankruptcies over the past several years, Ross Stores raised its long-term store growth targets. The company expects “Ross Dress For Less” to expand to 2,900 stores, compared with the previously mentioned 2,400 stores. Additionally, it anticipates dd’s DISCOUNTS to expand to 700 stores versus the earlier stated 600 stores. This represents a 20% increase in potential store growth targets, bringing it to 3,600 stores. This indicates a significant growth from the company’s store count of 1,923 stores at the end of fiscal 2021.

Financials

Ross Stores ended fiscal 2021 with cash and cash equivalents of $4,922.4 million, long-term debt of $2,452.3 million, and total shareholders’ equity of $4,060.1 million.

As of the end of the fiscal fourth quarter, consolidated inventories increased 23% versus the comparable 2019 period, driven by an increase in in-transit merchandise, owing to longer lead times resulting from the supply-chain headwinds. Average store inventory decreased slightly from the fiscal 2019 levels. Merchandise packaway levels were at 40% of total inventories compared with 46% at the end of fourth-quarter fiscal 2019.

Concurrent to the earnings release, Ross Stores authorized a new two-year share repurchase program. Under the program, the company intends to buy back shares worth up to $1.9 billion through fiscal 2023. This replaces the company’s existing repurchase program that was announced in May 2021 and had authorization worth $850 million remaining. Under the May 2021 program, the company bought back shares worth $650 million in fiscal 2021.

Also, the company raised its quarterly cash dividend by 9% to 31 cents per share, payable Mar 31, 2022, to shareholders of record as of Mar 15, 2022.

For fiscal 2022, the company plans to spend $800 million toward capital expenditure, with outlays for further investments in the supply chain to support long-term growth and technology to increase efficiencies across the business and market share growth.

Outlook

Going into fiscal 2022, Ross Stores expects difficult year-over-year comparisons from the prior year due to last year's government stimulus payments and reduced COVID-19 restrictions, leading to extraordinary consumer demand. These factors led to robust sales in Spring 2021.

Moreover, the company anticipates continued headwinds from the industry-wide supply-chain dynamics and other risks from inflation in consumer demand, as well as cost within its business.

Ross Stores expects comps to be flat to up 3% compared with 13% growth in fiscal 2021. Total sales are expected to increase 2-6% in fiscal 2022. Earnings per share for fiscal 2022 are envisioned to be $4.71-$5.12 per share compared with $4.87 in fiscal 2021. Operating margin is projected to be 11.6-12.1%, reflecting a decline from fiscal 2021. The deleverage can be attributed to lower same-store sales projections, as well as ongoing expense headwinds, which are expected to continue, particularly in the first half of fiscal 2022.

Net interest expenses are expected to be $70 million in fiscal 2022, while depreciation & amortization (including stock-based compensation) are likely to be $560 million. The company predicts effective tax rate of 24-25% for fiscal 2022, with shares outstanding expected to be 348 million.

Ross Stores notes that it is up for adverse year-over-year comparisons from the aforementioned stimulus benefits and increased demand. However, it has witnessed greater headwinds from elevated freight and wage expenses in early fiscal 2021.

Consequently, the company anticipates comps to be down 2-4% for first-quarter fiscal 2022 compared with 13% growth in first-quarter fiscal 2021. Sales are expected between a decline of 2% and growth of 1% from the prior-year period. Ross Stores expects earnings per share of 93-99 cents per share compared with earnings of $1.34 in first-quarter fiscal 2021.

The company expects operating margin to be 10.2-10.6% in the fiscal first quarter, down from 14.2% in the prior-year quarter. The operating margin is expected to be affected by negative comps forecast, and elevated freight and wage expenses. Net interest expenses are estimated to be $19 million, while the tax rate is expected to be 25%. Shares outstanding are likely to be 350 million.

Coming to its long-term targets, the company anticipates returning to double-digit earnings per share growth by fiscal 2023 and beyond. The rise is likely to be driven by robust comps growth, operating margin expansion, accelerated store opening and ongoing share repurchase program.

Stocks to Consider

We highlighted three better-ranked stocks in the Retail - Wholesale sector, namely Boot Barn BOOT, Capri Holdings CPRI and Dollar Tree DLTR.

Boot Barn, the lifestyle retailer of western and work-related footwear, apparel and accessories, currently sports a Zacks Rank #1 (Strong Buy). BOOT has an expected EPS growth rate of 20% for three-five years. Shares of BOOT have declined 29% in the past three months. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Boot Barn’s current-year sales and earnings per share (EPS) suggests growth of 62.6% and 220.8%, respectively, from the year-ago period’s reported figures. BOOT has a trailing four-quarter earnings surprise of 47.1%, on average.

Capri Holdings, which operates in the global personal luxury goods industry, flaunts a Zacks Rank of 1 at present. CPRI has a trailing four-quarter earnings surprise of 1,018.2%, on average. The stock has rallied 8.1% in the past three months.

The Zacks Consensus Estimate for Capri Holdings’ current-year sales and EPS suggests growth of 37.1% and 215.8%, respectively, from the year-ago period’s reported numbers. CPRI has an expected EPS growth rate of 30.9% for three-five years.

Dollar Tree, an operator of discount variety stores offering merchandise and other assortments, presently carries a Zacks Rank #2 (Buy). DLTR has a trailing four-quarter earnings surprise of 8.8%, on average. Shares of the company rose 2% in the past three months.

The Zacks Consensus Estimate for Dollar Tree’s current-year sales suggests growth of 3.4% from the year-ago period’s reported level, while the same for EPS suggests a year-over-year decline of 1.2%. DLTR has an expected EPS growth rate of 12.2% for three-five years.


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