Ross Ups 3Q Guidance on High Comps

Ross Stores Inc. (ROST - Snapshot Report), one of the largest off-price apparel and home fashion chain retailers in the U.S., came up with stronger-than-expected sales and same-store sales (comps) numbers for the five weeks ended September 29, 2012.

Driven by strong consumer demand for its wide array of brands, Ross Stores’ comps for September increased 8% compared with 5% in the prior-year period ended October 1, 2011 beating its own guidance range of 2%–3%. Consequently, the company’s total sales for the five-week period surged 10% to $0.800 billion compared with $0.726 billion in the year-ago period.

Further, Ross Stores reported eight months comps gain of 8% versus a 5% increase registered in the year-ago period. Net sales for the period jumped 13% to $6.245 billion from $5.549 billion in the year-ago quarter.

Robust sales mainly reflect the company’s relentless focus on offering an exciting collection in its name-brand fashion for the family and home, which appeals to its value-oriented customers.

Bolstered by solid top-line performance along with better physical inventory level in September, management raised its earnings guidance range for the third quarter of fiscal 2012. The company now expects earnings in the range of 70–71 cents per share, up from 63–66 cents projected earlier. However, the earnings forecast for the fourth quarter ending February 2, 2013 remains unchanged in between 99 cents and $1.04 per share.

Further, the company has provided its comps growth expectations for the month of October. Ross Stores expects comps to grow in the range of 3%– 4% in October, 2012.

Peer Performance

One of Ross Store’s competitors, Gap Inc. (GPS - Analyst Report) registered a 6% increase in its September 2012 comps. Another competitor – Zumiez Inc. (ZUMZ - Analyst Report) – also reported positive comps of 5% for the month.

Our Recommendation

Ross Stores has implemented a micro-merchandising strategy, through which it expects to enhance total sales and profitability by expanding in its existing markets. Moreover, Ross remains focused on new store growth, share buybacks and attractive dividend payouts even when some other retailers are implementing dramatic cutbacks. Moreover, the company has the financial strength to continue on its course and build shareholder value.

Ross Stores' shares maintain a Zacks #2 Rank, which translates into a short-term Buy rating. However, we remain slightly cautious on the stock and uphold our long-term Neutral recommendation, waiting to see further catalysts before becoming more positive on the stock.

Ross Stores and its subsidiaries operate two chains of off-price retail apparel and home accessory stores in the U.S. These stores offer branded apparel, shoes and accessories for the entire family, as well as gift items, linens and other home-related merchandise.