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Ross Stores (ROST) Tops Q4 Earnings, Falls on Cautious View

Zacks

Ross Stores, Inc. ROST reported solid fourth-quarter fiscal 2017 results, wherein both the top and bottom lines beat estimates and improved year over year. However, the company retained a cautious approach in forecasting views for fiscal 2018 as it continues to anticipate challenges from strong multi-year comparisons and a competitive retail landscape.

On that note, shares of Ross Stores declined 6.1% in the after-hours session yesterday. However, the stock has gained 33.3% in the last six months, outperforming the industry’s 23.1% upside.



Ross Store posted adjusted earnings of 98 cents a share that surpassed its guidance of 88-92 cents and the Zacks Consensus Estimate of 93 cents. Earnings also improved 27.3% from 77 cents reported in the prior-year period.

Ross Stores, Inc. Price, Consensus and EPS Surprise

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


Total sales for the quarter rose 16% to $4,067.8 million and beat the Zacks Consensus Estimate of $3,953.4 million, driven by a 5% increase in comparable-store sales (comps). Notably, sales and comps growth were also ahead of the company’s expected rise of 11-14% and 2-3%, respectively. Top-line growth was also driven by broad-based strength across major merchandise categories with children’s on the top. Further, sales were the strongest in Florida. Comps growth can primarily be attributed to the rise in traffic and increased average basket size.

Cost of sales increased 15.1% to $2,922.6 million and 50 basis points (bps) as a percentage of sales. The increase was driven by a 40-bp rise in merchandise margin as well as a 45-bp decline in occupancy costs. However, these were partly offset by higher freight expenses and volume costs. Additionally, selling, general and administrative expenses contracted 45 bps due to the leverage on comps gain and impact of the 53rd week.

Operating margin expanded 95 bps to 14.6%, which was better than the company’s expectation of 14% and 14.2%. This outperformance stemmed from improved merchandise margins, lower expenses on better-than-expected comps growth and gains from the 53rd week.

Store Update

As of Feb 3, 2018, Ross Stores operated 1,627 outlets, including 1,409 Ross Dress for Less stores and 213 dd's DISCOUNTS stores.

In first-quarter fiscal 2018, Ross Stores plans to open 29 new stores, including 23 Ross and 6 dd’s DISCOUNT outlets. For fiscal 2018, total store openings are estimated to be 100, with 75 Ross and 25 dd's DISCOUNTS locations. This guidance does not include the company’s plans to close or relocate nearly 10 older stores.

Financials

Ross Stores ended fiscal 2017 with cash and cash equivalents of $1,290.3 million, long-term debt of $312 million and total shareholders’ equity of $3,049.3 million.

During the reported quarter, the company bought back 3 million shares for $226 million. In fiscal 2017, the company completed its share repurchase target by buying back a total of 13.5 million shares for $875 million.

Moreover, the company increased its share repurchase authorization for 2018 to $1.075 billion, from $875 million targeted earlier. Additionally, the company also approved a 41% increase in quarterly cash dividend to 22.5 cents per share. The increased dividend is payable Mar 30, to shareholders with record as of Mar 19.

Guidance

Though Ross Stores remains encouraged by strong earnings and sales in the recent quarter, it believes challenging multi-year comparisons and the competitive retail landscape are concerns. Thus, the company retains a cautious approach in forecasting views for fiscal 2018. Notably, the company’s guidance for fiscal 2018 includes impacts from plans related to competitive wage and benefit-related investments, which will increase its minimum wage to $11.00 per hour.

The company projects earnings per share for fiscal 2018 in the range of $3.86-$4.03 compared with $3.55 per share reported for fiscal 2017. For the 52 weeks ending Feb 2, 2019, the company anticipates comps to increase 1-2% compared with a 4% growth registered in each of last three years.

In addition, the company expects sales growth of 3-4% in fiscal 2018, which will be impacted by benefits from the additional 53rd week in fiscal 2017. Operating margin for the quarter is projected between 13.3% and 13.5% compared with 14.5% recorded in fiscal 2017. The decline is likely to stem from flat merchandise margin and the impact from the aforementioned wage and benefit-related investments.

Net interest expenses are estimated at $600,000. Further, the tax rate is projected at 24-25% due to the tax reform legislation. The company estimates capital expenditure of nearly $475 million in fiscal 2018.

For first-quarter fiscal 2018, the company expects comps to increase 1-2%. Further, the company projects earnings per share in the range of $1.03-$1.07, versus 82 cents reported in the prior-year quarter.

Other assumptions include sales growth of 6-7% in the fiscal first quarter. Operating margin is projected in the range of 14.6-14.8% compared with 15.2% in the year-ago quarter. Net interest expenses are estimated at about $600,000, while the tax rate is expected to decline to nearly 23-24%.

Notably, the company’s earnings guidance for both first-quarter and fiscal 2018 includes a benefit of about 16 cents and 69 cents, respectively, from the recent tax legislation.

Zacks Rank and Key Picks

Ross Stores currently carries a Zacks Rank #2 (Hold). Other favorably-ranked stocks in the same space include Big Lots Inc. BIG, Dollar General Corp. DG and Dollar Tree Inc. DLTR. All three stocks carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Big Lots has a long-term growth rate of 13.5% and posted positive earnings surprise of nearly 11.1% in the trailing four quarters.

Dollar General delivered a positive earnings surprise of 3.7% in the trailing four quarters and has a long-term growth rate of 11.6%.

Dollar Tree delivered a positive earnings surprise of nearly 7.4% in the trailing four quarters and has a long-term growth rate of 13.9%.

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