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Ross Stores (ROST) Q1 Earnings & Sales Surpass Estimates

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Ross Stores, Inc. (ROST - Free Report) reported solid results for first-quarter fiscal 2021, wherein both top and bottom lines beat the Zacks Consensus Estimate and also advanced year over year. Results gained from pent-up customer demand, accelerated vaccination, government stimulus payments and easing of COVID restrictions.

Q1 Highlights

Ross Stores reported earnings of $1.34 per share, up 17% from $1.15 per share reported in the prior-year quarter. Moreover, the figure surpassed Zacks Consensus Estimate of 90 cents.

Total sales surged more than two-folds to $4,516.1 million and beat the Zacks Consensus Estimate of $3,941 million. Solid performance across the home category and Midwest region contributed to the top line. Also, the dd's DISCOUNTS business performed well.

Notably, comparable store sales (comps) improved 13% in the first quarter owing to higher average basket size. Although traffic declined compared to fiscal 2019 levels, it improved sequentially.

Cost of goods sold (COGS) declined 69.2% to nearly $3,198.4 million. As a percentage of sales, COGS contracted significantly to 71% compared with 103% in the last-year quarter. The downside was due to higher freight costs of 75 bps (stemming from supply-chain bottlenecks in the industry), an 85-bps increase in merchandise margin, elevated buying costs of 10 bps, increased distribution expenses of 25 bps (led by escalated wages somewhat offset by favorable timing of packaway costs) and occupancy deleverage of 60 bps (due to lower sales).

Selling, general and administrative (SG&A) expenses increased 63% to $675.1 million while the metric, as a percentage of sales, contracted 750 bps to 15%. This reflected operating expenses associated with the pandemic and higher incentive costs. Incidentally, the company recorded net COVID-19 expenses of roughly 35 bps in the first quarter, which had a greater impact on SG&A than COGS.

Apart from these, operating margin of 14.2% inched up from 14.1% in the first quarter of fiscal 2019.

Ross Stores, Inc. Price, Consensus and EPS Surprise

Store Update

In fiscal 2021, the company continues to expect opening of nearly 60 new locations, including 40 Ross Dress for Less and 20 dd’s DISCOUNTS. Also, it plans to shut down or relocate nearly 10 older stores. Moreover, it intends to open roughly 100 stores in fiscal 2022. Management anticipates opening 22 Ross Dress for Less and eight dd’s DISCOUNTS stores in the second quarter of fiscal 2021.

As of the end of the quarter, consolidated inventories declined 6% year over year. Packaway levels were at 34% compared to 44% last year. Further, average store inventories were down 1%.

Financials

Ross Stores ended the quarter with cash and cash equivalents of $5,367 million, long-term debt of $2,449.2 million and total shareholders’ equity of $3,652.8 million.

Moreover, the company’s board resumed share repurchases by approving a new share repurchase program of up to $1.5 billion, wherein it can buy back $650 million in fiscal 2021 and the rest in the next fiscal.

Outlook

Management stated that it will post results for fiscal 2021 in comparison with fiscal 2019. Major impacts from the extended closure of the company’s operations in spring 2020, together with the ongoing pandemic-led hurdles, make fiscal 2019 a more appropriate basis for comparison. Consequently, the below guidance reflects comparisons from respective fiscal 2019 periods.

For fiscal 2021, comps are likely to be up 7-9% with sales envisioned to rise 11-13%. Adjusted earnings are expected to be $3.93-$4.20 per share, with operating margin of 10.7-11.2%.

For the second quarter of fiscal 2021, earnings per share are projected in the range of 80-89 cents. Comps for the 13 weeks ended Jul 31, 2021, are likely to rise 5-7%. Moreover, sales are anticipated to grow 9-12%. Further, it expects operating margin to be 9.2-9.9%. Also, this guidance includes a potential rise in freight, wages and other COVID-related expenses. In fact, COVID-related costs are forecasted to affect EBIT margins by nearly 100 basis points in the said period.

Price Performance

Shares of the Zacks Rank #3 (Hold) company have gained 1% in the past three months compared with the industry’s growth of 7.4%.

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