Ross Stores (ROST) Q3 Earnings Beat, Soft Margin Hurts Stock

Ross Stores, Inc. ROST has reported better-than-expected third-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, which has hurt investors’ sentiment.

Notably, higher freight costs have been a headwind for the company for over a year now. The increase mainly stemmed from significant rise in market rates due to a tight capacity, resulting from driver shortages, impacts of increased regulation and the stronger economy. Moreover, Ross Stores expects headwinds related to higher freight costs to persist throughout fiscal 2018.

Consequently, shares of Ross Stores have declined 7.8% in the pre-market hours. Moreover, this Zacks Rank #2 (Buy) stock has decreased 5.7% in the past three months, underperforming the industry’s 1.6% decline.

Ross Store posted earnings of 91 cents per share, which considerably surpassed the company’s guidance of 84-88 cents and beat the Zacks Consensus Estimate by a penny. Earnings also improved 26.4% from 72 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 rose 6.6% to $3,549.6 million and beat the Zacks Consensus Estimate of $3,563 million, driven by 3% increase in comparable-store sales (comps). Notably, sales and comps growth surpassed the company’s projected rise of 5-6% and 1-2%, respectively.

The cost of sales increased 7.5% to $2,547.3 million and 240 basis points (bps) as a percentage of sales. Selling, general and administrative expenses increased 8.6% to $561.6 million and 30 bps as a percentage of sales.

Operating margin of 12.4% in the reported quarter reflected a decline of about 90 bps from 13.3% in the prior-year quarter due to increased freight costs and wage-related investments for the year, which more than offset gains from higher merchandise margins. However, operating margin outperformed the company’s expectation of 11.9-12.1%.

Store Update

As of Nov 3, 2018, Ross Stores operated 1,720 outlets — including 1,483 Ross Dress for Less stores and 237 dd's DISCOUNTS stores.

Financials

Ross Stores ended third-quarter fiscal 2018 with cash and cash equivalents of $1,349.2 million, long-term debt of $312.3 million, and total shareholders’ equity of $3,187.2 million.

During the reported quarter, the company bought back 2.9 million shares for $278 million. For the first nine months of fiscal 2018, it repurchased 9.4 million shares for nearly $807 million. It remains on track to repurchase shares worth $1.075 billion in fiscal 2018.

Additionally, it approved a quarterly cash dividend of 22.5 cents per share. The increased dividend is payable on Dec 28 to shareholders of record as of Dec 7.

Guidance

Going into the holiday season, Ross Stores expects to witness the toughest sales comparisons from fiscal 2017. Additionally, it expects the retail environment to be extremely competitive. Though the company anticipates a strong fiscal fourth quarter, it continues to anticipate comps growth of 1-2%. This will compare with comps growth of 5% witnessed in the prior-year quarter. However, the company raised its earnings per share view for the fourth quarter and fiscal 2018.

Ross Stores now expects earnings per share of about $1.09 to $1.14 for the fiscal fourth quarter versus $1.02-$1.07 mentioned earlier. The revised guidance includes one-time, non-cash gain of 7 cents from the favorable resolution of a tax issue. It also compares with $1.19 per share earned in the year-ago quarter, which includes benefits of 14 cents and 10 cents, respectively, from one-time revaluation of deferred taxes and the 53rd week.

For fiscal 2018, the company now projects earnings per share of $4.15-$4.20, marking an increase from $4.01-$4.10 projected earlier.

Looking for More? Check These Lucrative Picks

Other top-ranked stocks in the same industry are Burlington Stores Inc. BURL, Dollar General Corp. DG and Target Corp. TGT, each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Burlington Stores has surged 49.2% in the past year. It has average long-term earnings per share growth rate of 20.8%.

Dollar General has returned 27.5% in the past year. It has average long-term earnings per share growth rate of 13.6%.

Target stock has escalated 35.8% in the past year. Moreover, the company has average long-term earnings per share growth rate of 6.7%.

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