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Why Is Ross Stores (ROST) Up 3.1% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for Ross Stores (ROST). Shares have added about 3.1% in that time frame, underperforming 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 its most recent earnings report in order to get a better handle on the important catalysts.

Ross Stores Beats on Q3 Earnings, Raises FY19 View

Ross Stores reported robust third-quarter fiscal 2019 results, wherein both the top line and the bottom line surpassed the Zacks Consensus Estimate. This marks the second straight quarter of positive surprise. Further, earnings and sales improved on a year-over-year basis. Also, the company’s operating profit margin benefited from solid sales and growth in merchandise margins during the reported quarter. The company updated its fourth-quarter and fiscal 2019 guidance.

For fiscal 2019, the company expects earnings per share to be $4.52-$4.57. It reported $4.26 earnings per share in fiscal 2018. Earlier, the company projected earnings per share of $4.41-$4.50 for fiscal 2019. The company continues to expect earnings per share of $1.20-$1.25 for the fiscal fourth quarter. It earned earnings per share of $1.20 in the year-ago period.

Q3 Highlights

Ross Stores posted earnings of $1.03 per share, which beat the Zacks Consensus Estimate of 97 cents and surpassed the company’s guidance of 92-96 cents. Further, earnings grew 13.2% from 91 cents reported in the prior-year period. This was driven by higher revenues and share repurchase activities.  

Total sales rose 8.4% to $3,849.1 million and also surpassed the Zacks Consensus Estimate of $3,774 million. Comparable-store sales (comps) improved 5% driven by 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 children's category, and in the Midwest regions. Also, sales trend in ladies business continued to improve in the quarter. However, Ross Stores does not expect Ladies apparel business to aid performance in the fourth quarter. Nevertheless, the company remains confident that the initiatives undertaken for this category will drive additional gains during the holiday selling season and into 2020.

Cost of goods sold (COGS) rose 8.6% to $2,766.4 million. As a percentage of sales, COGS grew 10 basis points (bps) due to higher distribution expenses of 45 bps, which was offset by occupancy and buying leverage of 10 bps and 5 bps, respectively, and rise in merchandise margins of 20 bps. Meanwhile, freight costs remained flat. Selling, general and administrative expenses rose 7.7% to $604.6 million. As a percentage of sales, SG&A expenses decreased 10 bps.

Operating margin of 12.4% was better than expected, driven by higher sales and improved merchandise margin. The company had earlier guided operating margin in the range of 11.8-12% for the third quarter.

Store Update

The company successfully reached its target of opening 42 stores in the fiscal third quarter, which included 30 Ross and 12 dd’s DISCOUNTS stores. As of Nov 2, 2019, Ross Stores operated 1,810 outlets, including 1,550 Ross Dress for Less stores and 260 dd's DISCOUNTS stores. Furthermore, with this third round of store opening, the company completed its target for fiscal 2019.

Financials

Ross Stores ended the fiscal third quarter with cash and cash equivalents of $1,142.7 million, long-term debt of $312.8 million, and total shareholders’ equity of $3,276.8 million.

In the reported quarter, the company repurchased 3 million shares for $326 million. This brings the total share repurchases for the first nine months of fiscal 2019 to 9.6 million for $966 million. With this, the company remains on track to repurchase shares worth $1.275 billion in fiscal 2019.

Concurrent to the earnings release, Ross Stores also announced a quarterly dividend payout of 25.5 cents per share, payable Dec 31 to shareholders of record as of Dec 6.

Guidance

For the fourth quarter of fiscal 2019, the company anticipates comps growth of 1-2%. It expects total sales to increase 5-6%. Operating margin is projected at 13-13.2%. The same was 13.2% in the prior-year quarter. Moreover, the company estimates net interest income of $2.3 million in the fiscal fourth quarter, with a tax rate of 22-23%.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision flatlined during the past month.

VGM Scores

Currently, Ross Stores has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

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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