Ross' Bottom Line Meets, Guides Up

Ross Stores Inc. ( ROST - Snapshot Report ) , one of the leading off-price retailers of apparels and home accessories, recently posted earnings of 93 cents per share for first-quarter 2012, in line with the Zacks Consensus Estimate.

Earnings grew 26% from the prior-year adjusted level of 74 cents a share, primarily due to the company's ability to attract bargain hunters who value both quality and price. Moreover, favorable weather conditions in the company’s operating regions also benefited the results.

Let’s Dig Deep

Net sales for the quarter increased 14% to $2,356.8 million from $2,074.6 million in the prior-year quarter, and beat the Zacks Consensus Estimate of $2,338.0 million. This robust increase in net sales was primarily backed by initiatives taken by the company to keep merchandise fresh by reducing store inventories and providing a wide range of fashion brands. Comparable store sales increased 9% during the period.

Gross profit in dollar terms increased 14.2% to $677.7 million from $593.4 million in the year-ago quarter primarily due to lower cost of goods sold as a percentage of sales. Consequently, gross profit margin expanded 20 basis points year over year at 28.8% from 28.6% in the year-ago quarter.

Increased merchandise gross profit, leverage on operating expenses and rise in comparable store sales led to a 19.6% increase in operating income to $339.9 million from the prior-year level of $284.2 million. Consequently, operating margin for the quarter expanded 70 basis points to 14.4%.

Other Financial Aspects

Ross Stores, which faces stiff competition from Kohl's Corporation ( KSS - Analyst Report ) and Wal-Mart Stores Inc. ( WMT - Analyst Report ) , ended the quarter with cash and cash equivalents of $741.1 million compared with $671.0 million at the end of the prior-year quarter.

During the reported quarter, Ross generated $297.3 million of operating cash flows. This will enable the company to make capital investments, pay dividends and repurchase shares. At the end of the quarter, the company had a long-term debt of $150.0 million and shareholders' equity of $1,610.6 million.

During the quarter, the company bought back 2.0 million shares for $111 million under its existing $900 million share repurchase program authorized last year. The company has completed its first stage of the program by buying back $450 million of shares during fiscal 2011. Now the company plans to repurchase $450 million in fiscal 2012.

Guidance

Buoyed by strong results in the first quarter, Ross Stores increased its guidance for fiscal 2012. The company expects earnings per share in the range of $3.26 to $3.37 compared with the earlier guidance of $3.12 - $3.27, and represents 14% to 18% year-over-year growth. The current Zacks Consensus Estimate stands at $3.37 per share for fiscal 2012.

For the second quarter of fiscal 2012, the company expects same-store sales to increase 3% to 4%, compared with gains of 5% and 4% recorded in the second quarter of 2011 and 2010, respectively. Earnings per share for the second quarter are expected in the range of 72 cents to 75 cents, with an expected growth rate of 13% to 17% from 64 cents earned in the second quarter of 2011. The current Zacks Consensus Estimate for second quarter 2012 is 75 cents per share.

Further, in a move to increase its top line, the company is focusing to double its store count in the United States. The company in the long run expects to operate nearly 2000 Ross Dress for Less stores, compared with its earlier projection of 1500 stores. Moreover, Ross Stores expects to operate approximately 500 dd’s DISCOUNTS stores in the long run.

Our Take

Ross Stores has implemented a micro-merchandising tool, through which the company expects to enhance its total sales and profitability by targeting expansion in its existing markets. Moreover, Ross remains focused on new store growth, share buybacks and has the financial strength to continue its course and build shareholder value.

Currently, we have a long-term Neutral recommendation on the stock. Moreover, Ross Stores holds a Zacks #3 Rank, which translates into a short-term Hold rating.