Shares of Ross Stores Inc. (ROST Quick QuoteROST - Free Report) rose 2.6% in the after-hours trading session yesterday after the company reported robust second-quarter fiscal 2016 results. Both the top and the bottom lines beat our estimates as well as the company’s projections. Moreover, earnings and sales improved year over year. The strong results stemmed from impressive dd’s DISCOUNT performance as well as the improvement made in the ladies’ apparel business, which remained troubled in the spring season.

The company’s second-quarter fiscal 2016 earnings of 71 cents per share were substantially ahead of its guidance of 64–67 cents and the Zacks Consensus Estimate of 67 cents. Additionally, earnings were nearly 13% higher than 63 cents earned in the year-ago quarter.

Total sales increased about 7% to $3,180.9 million, backed by positive response from value-focused customers to the company’s extensive collection of brand bargains. Sales growth in the quarter broke the higher extremity of the company’s forecast of 4–5% growth. Also, sales surpassed the Zacks Consensus Estimate of $3,131 million.

Ross Stores’ comparable-store sales (comps) grew 4%, the same as the growth seen in the prior-year quarter. The increase in the reported quarter was driven by a rise in both the size of average basket and traffic.

Operating margin expanded 50 basis points (bps) year over year to 14.4% driven by growing merchandise gross margins in the quarter. Further, operating margin was slightly above the company’s guidance of 13.8–14%.

Store Update

During the fiscal second quarter, the company opened 24 new Ross and 7 dd’s DISCOUNTS stores, remaining on track with its store growth plans. As of Jul 30, 2016, Ross Stores operated 1,317 Ross Dress for Less stores across 34 states, the District of Columbia and Guam as well as 184 dd’s DISCOUNTS outlets across 14 states.

In fiscal 2016, the company plans to open 90 new locations, including about 70 Ross and 20 dd’s DISCOUNTS stores. Additionally, the company expects to close or relocate nearly 10 older stores. The company targets to open 34 new stores in the fiscal third quarter, comprising 25 Ross and 9 dd’s DISCOUNTS stores.

Financials

Ross Stores ended the reported quarter with cash and cash equivalents of $927.7 million, long-term debt of $396.3 million and total shareholders’ equity of $2,614.3 million.

During the fiscal second quarter, the company bought back 3.1 million shares for about $176 million, bringing the year-to-date repurchases to about 6.2 million shares for $352 million. With this, the company remains on track to buy back about $700 million worth of shares in fiscal 2016. This will mark the completion of the company’s two-year $1.4 billion share repurchase authorization that was approved in Feb 2015.

Guidance

Though Ross Stores expects to face challenges related to strong year-over-year comparisons amid macroeconomic uncertainty and a volatile retail landscape, it remains confident of performing well in the year ahead. As it enters the second half of fiscal 2016, the company remains committed to improve its merchandise assortments in the ladies’ apparel business, which struggled in the spring season.

For fiscal third quarter, the company expects earnings in the range of 52–55 cents per share compared with 53 cents earned in the prior-year quarter. However, the company’s forecast is below the Zacks Consensus Estimate of 58 cents per share.

Total sales for the fiscal third quarter are expected to grow 4–5%, with comps expected to be up 1–2% compared with 3% growth last year. Operating margin is expected within the range of 11.6–11.8% compared with 12.1% in the prior-year quarter. Interest expense is expected at $4.5 million, while the tax rate is projected at 36–37%.

Moreover, the company provided a preview of its expectations for the fiscal fourth quarter. The company anticipates comps growth in the range of 1–2% compared with 4% gain recorded in the prior-year quarter. Earnings are forecast in the range of 73–76 cents per share versus 66 cents earned in the prior-year quarter.

On the back of the first-half results and second-half fiscal 2016 projections, the company now anticipates earnings per share for fiscal 2016 in the range of $2.69–$2.75, reflecting  about 7–10% growth from $2.51 (14% growth) recorded in fiscal 2015. The company’s previous earnings guidance was $2.63–$2.72 per share.

Zacks Rank

Ross Stores currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the discount-retail space include Burlington Stores Inc. (BURL Quick QuoteBURL - Free Report) , with a Zacks Rank #1 (Strong Buy), along with Dollar Tree Inc. (DLTR Quick QuoteDLTR - Free Report) and Tuesday Morning Corporation , each carrying a Zacks Rank #2 (Buy).

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