A month has gone by since the last earnings report for Ross Stores (ROST). Shares have lost about 7.4% 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 the most recent earnings report in order to get a better handle on the important drivers.
Ross Stores Beats Q4 Earnings & Sales Estimates
Ross Stores reported robust fourth-quarter fiscal 2022 results, wherein the top and bottom lines beat the Zacks Consensus Estimate and our estimate. The company’s results benefited from positive customer response to its improved merchandise and strong value offerings despite the competitive environment. Also, earnings improved year over year while sales declined. Sales were hurt by the ongoing inflationary pressure on its low-to-moderate income group customers.
Ross Stores’ earnings of $1.31 per share beat the Zacks Consensus Estimate of $1.23 and our estimate of $1.19. Earnings also improved 26% from $1.04 reported in the fourth quarter of fiscal 2021.
Total sales of $5,214.2 million dropped 3.9% year over year but surpassed the Zacks Consensus Estimate of $5,130 million and our estimate of $5,108.5 million. In fourth-quarter fiscal 2022, comps improved 1% compared with growth of 9% in the year-ago quarter. Comps benefited from higher average basket size due to flat traffic trends compared with the last year.
In the holiday season, the shoes category remained the key growth driver, with Florida being the top-performing region. Sales trends continued to improve at the dd’s DISCOUNTS format, similar to the Ross chain of stores. However, dd’s DISCOUNTS’ sales continued to trail Ross’ due to ongoing inflationary pressures, which are having a huge impact on dd’s low-income customers.
The cost of goods sold (COGS) of $3,926.2 million increased 4% year over year. As a percentage of sales, COGS was 75.3%, marking a year-over-year increase of 15 basis points (bps). The increase resulted from higher distribution expenses, offset by a higher merchandise margin and lower buying expenses. Distribution costs rose 90 bps, owing to the unfavorable timing of pack-away-related expenses and deleverage from its new Houston distribution center. However, higher expenses were somewhat offset by a 5 bps occupancy deleverage and a 20 bps decline in domestic freight.
Increased distribution expenses were offset by an 85 bps decline in buying costs due to lower incentive compensation. Also, the merchandise margin increased 15 bps in the quarter, owing to lower ocean freight, which was more than offset by higher markdowns.
Selling, general and administrative (SG&A) expenses of $729.3 million declined 3.5% year over year. SG&A, as a percentage of sales, contracted 105 bps year over year to 14%. The decrease resulted from lower incentive costs.
The operating margin of 10.7% expanded 90 bps from 9.8% in fourth-quarter fiscal 2021. The increase can be attributed to lower freight and incentive costs, partly negated by the unfavorable timing of packaway-related costs.
As of Jan 28, 2023, Ross Stores operated 2,015 outlets, including 1,693 Ross stores across 40 states, the District of Columbia and Guam and 322 dd’s DISCOUNTS stores in 21 states.
In first-quarter 2023, the company expects to open 19 stores, comprising 11 Ross and eight dd's DISCOUNTS stores. In fiscal 2023, it expects to open 100 stores, including 75 Ross and 25 dd’s DISCOUNTS. These openings do not include the plans to close 10 existing stores in fiscal 2023.
Ross Stores ended fiscal 2022 with cash and cash equivalents of $4,551.9 million, long-term debt of $2,456.5 million and total shareholders’ equity of $4,288.6 million.
As of the end of fiscal 2022, consolidated inventories declined 10.6% from the fiscal 2021 comparable period, reflecting a significant moderation from the first half of fiscal 2022. Average store inventory was slightly lower in the quarter than the 2021 holiday period. Pack-away merchandise represented 40% of the total inventories, in line with the prior year.
The company bought back 2.1 million shares of common stock for $231 million in the fiscal fourth quarter. In fiscal 2022, it repurchased 10.3 million shares for an aggregate value of $950 million under its two-year, $1.9 billion authorization approved in March 2022. ROST is on track to repurchase the remaining $950 million under the existing plan in fiscal 2023.
Recently, Ross Stores increased its quarterly cash dividend by 8% to 33.5 cents per share. The dividend is payable Mar 31, 2022, to shareholders of record as of Mar 14, 2022.
For fiscal 2023, the company expects to spend $810 million on capital expenditures as it continues to make investments in stores, supply chain and merchant processes to support long-term growth and increase business efficiencies.
The company provided a conservative view for fiscal 2023, given the ongoing uncertainty in the macroeconomic and geopolitical environment. For fiscal 2023, it expects comps to be relatively flat, whereas it posted a 4% decline in fiscal 2022. ROST envisions sales growth of 2-5% for the 53 weeks ending Feb 3, 2024.
Based on the sales view, the company estimates the operating margin for fiscal 2023 to be 10.3-10.7%. The operating margin view incorporates the effects of the resetting of the baseline incentive compensation, higher wages, lower freight costs and the deleveraging effects of flat comps. The operating margin is also expected to benefit from the 53rd week to the tune of 20 bps.
The company anticipates earnings per share of $4.65-$4.95 for the 53 weeks ended Feb 3, 2024, whereas it posted $4.38 in fiscal 2022. The extra 53rd week is expected to aid fiscal 2023 earnings per share by 15 cents.
The company anticipates a net interest income of $115 million for fiscal 2023. Depreciation and amortization, including stock-based amortization, are expected to be $570 million. The fiscal 2023 tax rate is anticipated to be 24-25%, while shares outstanding are expected to be 339 million.
For first-quarter fiscal 2023, the company expects comps to be relatively flat for the 52 weeks ending Jan 27, 2024, whereas it reported 7% comps growth in the prior-year quarter. The comp performance is likely to reflect the continued impacts of elevated inflation on its low-to-moderate income customers. Sales are expected to increase 1-4% year over year in the fiscal first quarter.
The company envisions the operating margin for the first quarter of fiscal 2023 to be 9.6-9.9%, whereas it reported 10.8% in the prior year. The decline is expected to result from the deleveraging effect of comps performance, the unfavorable timing of packaway-related costs and elevated wages. However, the company expects merchandise margins to benefit from lower freight costs.
Earnings per share are envisioned between 99 cents and $1.05 for the fiscal first quarter. The company reported earnings of 97 cents per share in the year-ago quarter.
ROST anticipates a net interest income of $28 million for the fiscal first quarter. The tax rate is expected to be 24-25%, while shares outstanding are estimated to be 341 million.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month.
The consensus estimate has shifted -10.53% due to these changes.
At this time, Ross Stores has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. 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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