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Ross Stores (ROST) Jumps on Q3 Earnings Beat, Raised FY23 View
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Ross Stores, Inc. (ROST - Free Report) reported top and bottom-line beat in third-quarter fiscal 2023. Both metrics improved year over year. Results gained from positive customer response for its merchandise, which boosted the comps performance. Additionally, the company’s results reflected benefits from higher merchandise margin, as well as lower distribution expense, domestic freight and occupancy expense. This led to improved gross and operating margins in the quarter.
The company reiterated its fourth-quarter fiscal 2023 view due to cautiousness over the ongoing macroeconomic volatility, rising inflation, geopolitical uncertainty and tough year-over-year comparisons. However, it raised its earnings forecast for fiscal 2023 on strong year-to-date results and its outlook for the fiscal fourth quarter.
Shares of Ross Stores have jumped 6.2% following the robust third-quarter fiscal 2023 results and raised fiscal 2023 earnings view. Consequently, this Zacks Rank #2 (Buy) company’s shares have gained 6.9% in the past three months compared with the industry's growth of 1.4%.
Image Source: Zacks Investment Research
Q3 Insights
Ross Stores’ earnings of $1.33 per share beat the Zacks Consensus Estimate of earnings of $1.22. Earnings also improved 33% from the $1.00 per share reported in the third quarter of fiscal 2022.
Total sales of $4,924.8 million rose 7.9% year over year and surpassed the consensus estimate of $4,838 million. In third-quarter fiscal 2023, comparable store sales (comps) improved 5%, backed by improved traffic.
Sales were mainly driven by favorable customer response to the company’s merchandise across both banners. At Ross, it witnessed strength in cosmetic, accessories and shoes categories, with broad-based growth across all geographic areas. At dd’s DISCOUNTS, performance was driven by favorable customer response to its value offerings.
Our model had predicted comps growth of 2.6% for third-quarter fiscal 2023, driven by strength across its namesake and dd's DISCOUNTS business formats.
Ross Stores, Inc. Price, Consensus and EPS Surprise
The cost of goods sold (COGS) of $3,564.3 million increased 4.1% year over year and exceeded our estimate of $3,535.3 million. As a percentage of sales, COGS was 72.4%, marking a year-over-year contraction of 260 basis points (bps). Our model had estimated a 150-bps decline in COGS rate to 73.5%.
This decline in the COGS rate was mainly driven by a 235 bps increase in merchandise margin, resulting from lower ocean freight costs. Additionally, lower distribution expenses, domestic freight and occupancy expenses aided COGS. During the quarter, the company witnessed a 45-bps decline in distribution expenses, a 40-bps decline in domestic freight and 25-bps leverage from occupancy costs. These were partly offset by an 85-bps increase in buying costs, mainly resulting from higher incentives.
Selling, general and administrative (SG&A) expenses of $840.5 million increased 16.9% year over year and were higher than our estimate of $773.7 million. SG&A, as a percentage of sales, expanded 125 bps year over year to 16.5%. We had estimated the SG&A rate to be 16.1% for the fiscal third quarter, indicating a 90-bps increase year over year. The increase in the SG&A rate was mainly because of higher incentive costs and store wages.
The operating margin of 11.2% improved 140 bps year over year in third-quarter fiscal 2023 compared with 9.8% reported in the prior-year quarter. The growth was driven by improved comps, as well as reduced freight costs in the quarter, offset by elevated incentives and store wages.
Our model predicted an operating margin of 10.4% for the fiscal third quarter, suggesting 60-bps growth from last year.
Store Update
As of Nov 16, 2023, Ross Stores operated 2,112 outlets, including 1,765 Ross stores across 41 states, the District of Columbia and Guam and 347 dd’s DISCOUNTS stores in 22 states.
In third-quarter 2023, the company completed its targeted store expansion plans for fiscal 2023. It opened 43 Ross and eight dd's DISCOUNTS stores in the quarter. Through the nine months of fiscal 2023, the company opened 97 stores, including 72 Ross and 25 dd’s DISCOUNTS. It expects to close fiscal 2023 with 1,764 Ross stores and 345 dd’s DISCOUNTS stores. This reflects an addition of net 94 stores for the fiscal year.
Financials
Ross Stores ended the quarter with cash and cash equivalents of $4,499.5 million, long-term debt of $2,210.1 million and total shareholders’ equity of $4,583 million.
At the end of the fiscal third quarter, total consolidated inventories rose 5% year over year, while average store inventories improved 2%. Packaway merchandise was 39% of total inventories compared with 41% in the year-ago quarter.
The company bought back 2.1 million shares for $239 million in the fiscal third quarter. ROST is on track to repurchase a total of $950 million in fiscal 2023, which will mark the completion of its existing two-year $1.9 billion repurchase plan.
Outlook
The company reiterated its guidance for fourth-quarter fiscal 2023 due to the ongoing macroeconomic volatility, rising inflation and geopolitical uncertainty. Additionally, it expects to face the most difficult year-over-year comparisons in fourth-quarter fiscal 2023 due to a strong performance in the prior year. Incorporating the year-to-date results and the expectations for the fiscal fourth quarter, it raised its earnings per share view for fiscal 2023.
The company expects comps for the fourth quarter of 2023 to be up 1-2%. Total sales are anticipated to increase 8-10% year over year in the fiscal fourth quarter, including a $260 million gain from the 53rd week.
For the fiscal fourth quarter, earnings per share are envisioned to be $1.56-$1.62, up from the last-year quarter’s reported figure of $1.31. The guidance includes a 2 cents per share unfavorable impact from the timing of expenses that aided results in the fiscal third quarter.
The operating margin for the fiscal fourth quarter is expected to be 11.3-11.5% compared with the year-ago quarter’s reported figure of 10.7%, driven by gains from higher merchandise margins, owing to lower ocean freight costs and a 65-bps gain from the 53rd week. However, the company estimates these gains to be moderate compared with the improvement in the prior periods this year.
Operating margin for the fiscal fourth quarter is also likely to benefit from lower domestic freight and distribution costs, partly due to favorable packaway timing. The gains are expected to be partly offset by higher incentive compensation.
Net interest income is projected to be $45 million in the fiscal fourth quarter as ROST continues to benefit from higher interest rates on its cash balance. The tax rate is likely to be 23-24% for the fiscal fourth quarter, and diluted shares outstanding are expected to be $335 million.
For fiscal 2023, earnings per share are now estimated to be $5.30-$5.36, compared with the prior view of $5.15-$5.26. In fiscal 2022, the company reported earnings per share of $4.38. Its fourth-quarter and fiscal 2023 guidance is estimated to include a 16-cent gain from the additional 53rd week.
Other Stocks to Consider
Some other top-ranked companies in the Retail-Wholesale sector are American Eagle Outfitters (AEO - Free Report) , Abercrombie & Fitch (ANF - Free Report) and The TJX Companies (TJX - Free Report) .
The Zacks Consensus Estimate for AEO’s fiscal 2023 sales and EPS indicates 2.4% and 37.1% growth, respectively, from the year-ago period’s reported levels. The company has a trailing four-quarter earnings surprise of 43.2%, on average.
Abercrombie, which operates as a specialty retailer of premium, high-quality casual apparel for men, women, and kids, currently carries a Zacks Rank #2. The Zacks Consensus Estimate for ANF’s current fiscal-year sales suggests growth of 10.3% from the year-ago reported number.
The consensus mark for Abercrombie’s earnings of $4.47 per share suggests a significant growth from the year-ago period’s figure of 25 cents. ANF has a trailing four-quarter earnings surprise of 724.8%, on average.
TJX Companies, a leading off-price retailer of apparel and home fashions in the U.S. and worldwide, currently carries a Zacks Rank #2.
The Zacks Consensus Estimate for TJX Companies’ current financial-year sales and earnings suggests growth of 7.6% and 19.6%, respectively, from the year-ago period’s actual. TJX has a trailing four-quarter earnings surprise of 6.3%, on average.
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Ross Stores (ROST) Jumps on Q3 Earnings Beat, Raised FY23 View
Ross Stores, Inc. (ROST - Free Report) reported top and bottom-line beat in third-quarter fiscal 2023. Both metrics improved year over year. Results gained from positive customer response for its merchandise, which boosted the comps performance. Additionally, the company’s results reflected benefits from higher merchandise margin, as well as lower distribution expense, domestic freight and occupancy expense. This led to improved gross and operating margins in the quarter.
The company reiterated its fourth-quarter fiscal 2023 view due to cautiousness over the ongoing macroeconomic volatility, rising inflation, geopolitical uncertainty and tough year-over-year comparisons. However, it raised its earnings forecast for fiscal 2023 on strong year-to-date results and its outlook for the fiscal fourth quarter.
Shares of Ross Stores have jumped 6.2% following the robust third-quarter fiscal 2023 results and raised fiscal 2023 earnings view. Consequently, this Zacks Rank #2 (Buy) company’s shares have gained 6.9% in the past three months compared with the industry's growth of 1.4%.
Image Source: Zacks Investment Research
Q3 Insights
Ross Stores’ earnings of $1.33 per share beat the Zacks Consensus Estimate of earnings of $1.22. Earnings also improved 33% from the $1.00 per share reported in the third quarter of fiscal 2022.
Total sales of $4,924.8 million rose 7.9% year over year and surpassed the consensus estimate of $4,838 million. In third-quarter fiscal 2023, comparable store sales (comps) improved 5%, backed by improved traffic.
Sales were mainly driven by favorable customer response to the company’s merchandise across both banners. At Ross, it witnessed strength in cosmetic, accessories and shoes categories, with broad-based growth across all geographic areas. At dd’s DISCOUNTS, performance was driven by favorable customer response to its value offerings.
Our model had predicted comps growth of 2.6% for third-quarter fiscal 2023, driven by strength across its namesake and dd's DISCOUNTS business formats.
Ross Stores, Inc. Price, Consensus and EPS Surprise
Ross Stores, Inc. price-consensus-eps-surprise-chart | Ross Stores, Inc. Quote
The cost of goods sold (COGS) of $3,564.3 million increased 4.1% year over year and exceeded our estimate of $3,535.3 million. As a percentage of sales, COGS was 72.4%, marking a year-over-year contraction of 260 basis points (bps). Our model had estimated a 150-bps decline in COGS rate to 73.5%.
This decline in the COGS rate was mainly driven by a 235 bps increase in merchandise margin, resulting from lower ocean freight costs. Additionally, lower distribution expenses, domestic freight and occupancy expenses aided COGS. During the quarter, the company witnessed a 45-bps decline in distribution expenses, a 40-bps decline in domestic freight and 25-bps leverage from occupancy costs. These were partly offset by an 85-bps increase in buying costs, mainly resulting from higher incentives.
Selling, general and administrative (SG&A) expenses of $840.5 million increased 16.9% year over year and were higher than our estimate of $773.7 million. SG&A, as a percentage of sales, expanded 125 bps year over year to 16.5%. We had estimated the SG&A rate to be 16.1% for the fiscal third quarter, indicating a 90-bps increase year over year. The increase in the SG&A rate was mainly because of higher incentive costs and store wages.
The operating margin of 11.2% improved 140 bps year over year in third-quarter fiscal 2023 compared with 9.8% reported in the prior-year quarter. The growth was driven by improved comps, as well as reduced freight costs in the quarter, offset by elevated incentives and store wages.
Our model predicted an operating margin of 10.4% for the fiscal third quarter, suggesting 60-bps growth from last year.
Store Update
As of Nov 16, 2023, Ross Stores operated 2,112 outlets, including 1,765 Ross stores across 41 states, the District of Columbia and Guam and 347 dd’s DISCOUNTS stores in 22 states.
In third-quarter 2023, the company completed its targeted store expansion plans for fiscal 2023. It opened 43 Ross and eight dd's DISCOUNTS stores in the quarter. Through the nine months of fiscal 2023, the company opened 97 stores, including 72 Ross and 25 dd’s DISCOUNTS. It expects to close fiscal 2023 with 1,764 Ross stores and 345 dd’s DISCOUNTS stores. This reflects an addition of net 94 stores for the fiscal year.
Financials
Ross Stores ended the quarter with cash and cash equivalents of $4,499.5 million, long-term debt of $2,210.1 million and total shareholders’ equity of $4,583 million.
At the end of the fiscal third quarter, total consolidated inventories rose 5% year over year, while average store inventories improved 2%. Packaway merchandise was 39% of total inventories compared with 41% in the year-ago quarter.
The company bought back 2.1 million shares for $239 million in the fiscal third quarter. ROST is on track to repurchase a total of $950 million in fiscal 2023, which will mark the completion of its existing two-year $1.9 billion repurchase plan.
Outlook
The company reiterated its guidance for fourth-quarter fiscal 2023 due to the ongoing macroeconomic volatility, rising inflation and geopolitical uncertainty. Additionally, it expects to face the most difficult year-over-year comparisons in fourth-quarter fiscal 2023 due to a strong performance in the prior year. Incorporating the year-to-date results and the expectations for the fiscal fourth quarter, it raised its earnings per share view for fiscal 2023.
The company expects comps for the fourth quarter of 2023 to be up 1-2%. Total sales are anticipated to increase 8-10% year over year in the fiscal fourth quarter, including a $260 million gain from the 53rd week.
For the fiscal fourth quarter, earnings per share are envisioned to be $1.56-$1.62, up from the last-year quarter’s reported figure of $1.31. The guidance includes a 2 cents per share unfavorable impact from the timing of expenses that aided results in the fiscal third quarter.
The operating margin for the fiscal fourth quarter is expected to be 11.3-11.5% compared with the year-ago quarter’s reported figure of 10.7%, driven by gains from higher merchandise margins, owing to lower ocean freight costs and a 65-bps gain from the 53rd week. However, the company estimates these gains to be moderate compared with the improvement in the prior periods this year.
Operating margin for the fiscal fourth quarter is also likely to benefit from lower domestic freight and distribution costs, partly due to favorable packaway timing. The gains are expected to be partly offset by higher incentive compensation.
Net interest income is projected to be $45 million in the fiscal fourth quarter as ROST continues to benefit from higher interest rates on its cash balance. The tax rate is likely to be 23-24% for the fiscal fourth quarter, and diluted shares outstanding are expected to be $335 million.
For fiscal 2023, earnings per share are now estimated to be $5.30-$5.36, compared with the prior view of $5.15-$5.26. In fiscal 2022, the company reported earnings per share of $4.38. Its fourth-quarter and fiscal 2023 guidance is estimated to include a 16-cent gain from the additional 53rd week.
Other Stocks to Consider
Some other top-ranked companies in the Retail-Wholesale sector are American Eagle Outfitters (AEO - Free Report) , Abercrombie & Fitch (ANF - Free Report) and The TJX Companies (TJX - Free Report) .
American Eagle, a specialty retailer of casual apparel, accessories and footwear, currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for AEO’s fiscal 2023 sales and EPS indicates 2.4% and 37.1% growth, respectively, from the year-ago period’s reported levels. The company has a trailing four-quarter earnings surprise of 43.2%, on average.
Abercrombie, which operates as a specialty retailer of premium, high-quality casual apparel for men, women, and kids, currently carries a Zacks Rank #2. The Zacks Consensus Estimate for ANF’s current fiscal-year sales suggests growth of 10.3% from the year-ago reported number.
The consensus mark for Abercrombie’s earnings of $4.47 per share suggests a significant growth from the year-ago period’s figure of 25 cents. ANF has a trailing four-quarter earnings surprise of 724.8%, on average.
TJX Companies, a leading off-price retailer of apparel and home fashions in the U.S. and worldwide, currently carries a Zacks Rank #2.
The Zacks Consensus Estimate for TJX Companies’ current financial-year sales and earnings suggests growth of 7.6% and 19.6%, respectively, from the year-ago period’s actual. TJX has a trailing four-quarter earnings surprise of 6.3%, on average.