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Ross Stores Inc. (ROST - Analyst Report), one of the major off-price retailers of apparel and home accessories, came up with third-quarter fiscal 2013 earnings of 80 cents per share, surging 11.1% from 72 cents earned in the year-ago quarter. Further, quarterly earnings were in line with the Zacks Consensus Estimate. The year- over-year improvement in earnings was mainly based on better-than-expected gross margin during the quarter.

Behind the Headline Numbers

Net sales increased 6.0% year over year to $2,398.1 million compared with $2,262.7 million in the year-ago quarter. However, sales missed the Zacks Consensus Estimate of $2,439.0 million. Comparable store sales increased 2% versus 6% growth registered in the prior-year period.

During the quarter, Juniors and Missy sportswear emerged as the best performing merchandise categories. By region, Florida was the most productive.  

Gross profit, in dollar terms, increased 6.2% to $651.9 million from the year-ago quarter, while gross margin improved 10 basis points (bps) to 27.2%. The year-over-year expansion in gross margin was primarily due to a 10 basis points improvement in cost of goods sold, as a percentage of revenue, along with increase in sales.

Operating margin was 11.3% in the third quarter, nearly flat compared to last year. Operating margin mainly gained from higher merchandise gross margin, offset by lower shortage benefit. Additionally, an improvement in cost of goods sold as a percentage of sales during the quarter was offset by increased selling, general and administrative expenses as a percentage of sales.

Other Financial Aspects

Ross Stores exited the third quarter with cash and cash equivalents of $372.3 million compared with $623.8 million at the end of the prior-year quarter. As of Nov 2, 2013, the company possessed long-term debt of $150.0 million and shareholders' equity of $1,941.1 million.

During the nine months ended Nov 2, 2013, Ross Stores generated $681.2 million of cash from its operational activities as against $646.3 million in the comparable prior-year period.

Moreover, the company continued to enhance shareholder value by buying back 6.4 million shares for $421 million through the nine months ended Nov 2, 2013. Looking ahead, the company plans to repurchase another $129 million worth stock during the fourth quarter. As a result, the company remains on track to complete its targeted $550 million share repurchase in fiscal 2013, under its 2-year $1.1 billion authorization approved in Jan 2013.

Guidance

Given the expansion of the company brands portfolio by its merchants and a highly competitive and promotional forthcoming holiday season, Ross Stores has provided a conservative guidance for the fourth quarter and fiscal 2013. For the fourth quarter, the company projects earnings in the range of 97 cents - $1.01. Comps are expected to grow at the rate of 1%–2% as against a 5% increase in the prior-year period.

Total sales are anticipated to decline in the 1%–2% range. Operating margin in the fourth quarter is expected to contract nearly 120 to 140 basis points to 12.3% to 12.5%, while the tax rate is expected to be 37%.

For fiscal 2013, the company projects earnings in the range of $3.83 – $3.87.

Other Stocks to Consider

Currently, Ross Stores carries a Zacks Rank #3 (Hold). Other stocks worth considering in the retail space include CST Brands Inc. (CST - Snapshot Report), Big Lots Inc. (BIG - Analyst Report) and PriceSmart Inc. (PSMT - Snapshot Report). Of these, CST Brands has a Zacks Rank #1 (Strong Buy), while Big Lots and PriceSmart carry a Zacks Rank #2 (Buy).

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