Shares of Ross Stores Inc. (ROST - Free Report) rose 3.4% in the after-hours trading session on Nov 17, after the company reported robust third-quarter fiscal 2016 results. Both the top and bottom-line 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 growth in the ladies’ apparel business as customers favorably responded to its improved merchandise.
The company’s third-quarter fiscal 2016 earnings of 62 cents per share were substantially ahead of its guidance of 52–55 cents and the Zacks Consensus Estimate of 56 cents. Additionally, earnings were 17% higher than 53 cents earned in the year-ago quarter.
Total sales increased 10.9% to $3,086.7 million, backed by positive response from value-focused customers for 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. Further, sales surpassed the Zacks Consensus Estimate of $2,958 million.
Ross Stores’ comparable-store sales (comps) grew 7% compared with 3% 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 55 basis points (bps) year over year to 12.6% driven by higher merchandise margins in the quarter. Further, operating margin was slightly above the company’s guidance of 11.6–11.8%.
During the fiscal third quarter, the company completed its store opening target for fiscal 2016 with the addition of 25 new Ross and nine dd’s DISCOUNTS stores. As of Oct 29, 2016, Ross Stores operated 1,342 Ross Dress for Less stores across 36 states, the District of Columbia and Guam as well as 193 dd’s DISCOUNTS outlets across 15 states.
The company anticipates closing fiscal 2016 with 1,338 Ross and 192 dd’s DISCOUNTS, marking an increase of 84 stores in the year.
Ross Stores ended the reported quarter with cash and cash equivalents of $878.8 million, long-term debt of $396.4 million and total shareholders’ equity of $2,649.5 million.
During the fiscal third quarter, the company bought back 2.8 million shares for about $179 million, bringing the year-to-date repurchases to about 9.1 million shares for $530 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.
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 upcoming holiday season. In light of these headwinds, the company retained its comps guidance for the fiscal fourth quarter, while it slightly lowered its earnings per share forecast. However, the company raised its earnings guidance for fiscal 2016 on the back of the year-to-date results and projections for the fiscal fourth quarter.
The company continues to anticipate fiscal fourth-quarter comps growth in the range of 1–2% compared with 4% gain recorded in the prior-year quarter. Earnings are now estimated in the range of 72–75 cents per share compared with the company’s initial guidance of 73–76 cents. This also compares to earnings of 66 cents in the prior-year quarter.
Other assumptions for the fiscal fourth quarter include total sales growth 4–5%. Operating margin is anticipated within the range of 13.2–13.4% compared with 12.7% in the prior-year quarter. Interest expense is expected at $4 million, while the tax rate is projected at 36–37%.
For fiscal 2016, the company now anticipates earnings per share in the range of $2.78–$2.81 versus $2.69–$2.75 expected previously. The revised guidance will reflect earnings per share growth of about 11–12% year over year compared with the previous guidance of 7–10% increase.
Ross Stores currently carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the discount-retail space include Burlington Stores Inc. (BURL - Free Report) and Target Corp. (TGT - Free Report) , both carrying a Zacks Rank #2 (Buy). Another stock worth considering in the retail space is Zumiez Inc. (ZUMZ - Free Report) , which also carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Burlington Stores has gained nearly 80.7% year to date. Moreover, it has a long-term earnings growth rate of 18.4%.
Target, with a long-term earnings growth rate of 4.9%, has increased nearly 9.8% year to date.
Zumiez has jumped 64.4% year to date. The stock has a long-term earnings growth rate of 15%.
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