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Ross Stores (ROST) Tops Earnings & Sales Estimates in Q2

Ross Stores, Inc. ROST reported solid second-quarter fiscal 2022 results, wherein the top and bottom lines surpassed the Zacks Consensus Estimate. However, both metrics declined year over year. Results were hurt by ongoing inflationary pressure and an increasing promotional retail environment. On the flip side, lower incentive costs acted as an upside.

Shares of ROST have lost 0.7% in the past three months against the industry’s growth of 21.3%.

Q2 Insights

Ross Stores’ earnings of $1.11 per share beat the Zacks Consensus Estimate of 98 cents but declined 20.1% from $1.39 reported in the second quarter of fiscal 2021.

Total sales of $4,583 million dropped 4.6% year over year but surpassed the Zacks Consensus Estimate of $4,579 million.

In the quarter, shoes and men’s categories remained key growth drivers, with Florida and Texas being the top-performing regions. However, continued weakness in the dd’s DISCOUNTS performance in the fiscal second quarter due to escalating inflationary pressures acted as deterrents.

 

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

 

In second-quarter fiscal 2022, comps declined 7% compared with comps growth of 15% in the year-ago quarter, owing to elevated freight costs, which have been escalating from the second half of fiscal 2021. This was somewhat offset by lower incentive costs.

Cost of goods sold (COGS) of $3,399.5 million dipped 0.3% year over year. As a percentage of sales, COGS was 74.2%, marking a year-over-year increase of 320 basis points (bps) due to lower merchandise margins, higher ocean freight and increased markdowns.

Distribution costs escalated 85 bps, owing to unfavorable timing of pack-away-related expenses and deleverage from its new distribution center. Also, domestic freight expenses rose 35 bps and occupancy deleveraged 55 bps. However, higher expenses were somewhat offset by a 60-bps decline in buying costs.

Selling, general and administrative (SG&A) expenses of $667.1 million declined 7.1% year over year. SG&A, as a percentage of sales, contracted 30 bps year over year to 14.6%. The decrease resulted from deleveraging effect of lower comps, which was more than offset by lower incentive costs.

The operating margin of 11.3% declined 280 bps from 14.1% in second-quarter fiscal 2021. The decline can be attributed to the deleveraging effect of the comps decline, higher markdowns and ongoing headwinds related to elevated freight costs, which have been escalating from the second half of fiscal 2021. However, lower incentives and COVID-19 costs remained upsides.

Store Update

In second-quarter fiscal 2022, the company opened 21 Ross stores and eight dd’s DISCOUNTS stores. As of Jul 30, 2022, Ross Stores operated 1,980 outlets, including 1,669 Ross stores across 40 states, the District of Columbia and Guam, and 311 dd’s DISCOUNTS stores in 21 states.

The company remains on track to open 100 stores in fiscal 2022, including 75 Ross and 25 dd's DISCOUNTS stores. Management is likely to open 41 stores in the fiscal third quarter, including 29 Ross and 12 dd’s DISCOUNTS stores. Additionally, it anticipates closing 10 older stores in fiscal 2022.

Financials

Ross Stores ended second-quarter fiscal 2022 with cash and cash equivalents of $3,903.7 million, long-term debt of $2,454.4 million, and total shareholders’ equity of $4,127 million.

As of the end of the fiscal second quarter, consolidated inventories increased 55% from the 2021 comparable period, driven by higher packaway inventory. Average store inventory increased 15% in the quarter, in line with the pre-pandemic levels. Merchandise packaway levels were 41% of the total inventories compared with 30% at the end of second-quarter fiscal 2021.

Additionally, supply-chain congestions slightly eased in the fiscal second quarter, resulting in the early receipt of merchandise that is now stored in packaway and will flow to stores later in the year.

This Zacks Rank #3 (Hold) company bought back 2.9 million shares of common stock for $235 million in the fiscal second quarter. Earlier, the company expected to repurchase $950 million under its existing $1.9-billion share repurchase plan, which remains valid till fiscal 2023.

In a recent development, Ross Stores declared a regular quarterly cash dividend of 31 cents per share, payable Sep 30, 2022, to shareholders of record as of Sep 6, 2022.

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

Outlook

Given the fiscal second-quarter performance and the uncertain macro-environment, Ross Stores provided a conservative view for the rest of fiscal 2022.

For third-quarter fiscal 2022, the company expects a comps decline of 7-9%, whereas it reported 14% growth in the prior-year quarter. Fiscal fourth-quarter comps are expected to decline 4-7% year over year.

Earnings per share are envisioned to be 72-83 cents, whereas it reported $1.09 in third-quarter fiscal 2021. Fiscal fourth-quarter earnings are likely to be $1.04-$1.21, whereas it recorded $1.04 in the year-ago quarter. For fiscal 2022, earnings are projected to be $3.84-$4.12, which compares unfavorably with the prior mentioned $4.34-$4.58. Notably, it reported $4.87 in fiscal 2021.

The company expects the operating margin to be 7.8-8.7% for the fiscal third quarter, down from 11.4% reported in the prior-year quarter. The operating margin is expected to be affected by the negative comp forecast, lower merchandise margin stemming from ocean freight costs and sluggish sales view, and increased markdowns. Also, the unfavorable timing of packaway-related costs is likely to hurt the operating margin.

Stocks to Consider

Here are three better-ranked stocks to consider — Dollar General DG, Costco COST and Dollar Tree DLTR.

Dollar General, a discount retailer, currently carries a Zacks Rank #2 (Buy). DG has an expected EPS growth rate of 12.8% for three to five years. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Dollar General’s current financial-year revenues and EPS suggests growth of 10% and 13.4%, respectively, from the year-ago reported figure. Dollar General has a trailing four-quarter earnings surprise of 2.8%, on average.

Costco, which is engaged in the operation of membership warehouses, currently carries a Zacks Rank #2. COST has an expected EPS growth rate of 9.2% for three to five years.

The Zacks Consensus Estimate for Costco’s current financial-year sales and EPS suggests growth of 15.4% and 18.2%, respectively, from the year-ago period’s reported figures. COST has a trailing four-quarter earnings surprise of 9.7%, on average.

Dollar Tree operates discount variety retail stores. The company currently carries a Zacks Rank #2. DLTR has an expected EPS growth rate of 15.5% for three to five years.

The Zacks Consensus Estimate for Dollar Tree’s current financial-year revenues and EPS suggests growth of 6.7% and 40.7%, respectively, from the year-ago reported figures. DLTR has a trailing four-quarter earnings surprise of 13.1%, on average.


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