Ross Stores, Inc. (ROST - Free Report) reported better-than-expected first-quarter fiscal 2018 results despite an unfavorable weather throughout the quarter. Notably, both top and bottom lines beat estimates and improved year over year. However, the company provided a softer-than-expected earnings view for second-quarter fiscal 2018. Further, the company’s projection of higher freight costs has hurt investors’ sentiment.
Notably, higher freight costs have been a headwind for the company for over a year now. The increase mainly stemmed from significant rise in market rates due to a very tight capacity, due to driver shortages, impacts of increased regulation and the stronger economy. Further, diesel costs shot up nearly 20% in the fiscal first quarter compared with last year. Consequently, the company expects headwinds related to higher freight costs to persist throughout fiscal 2018, which is reflected in its guidance.
On that note, shares of Ross Stores declined 4.8% in yesterday’s after-hours session. However, the stock has gained 3.2% in the past month, outperforming the industry’s 0.6% upside.
Ross Store posted adjusted earnings of $1.11 per share, which surpassed the company’s guidance of $1.03-$1.07 and the Zacks Consensus Estimate of $1.06. Earnings also improved 35.4% from 82 cents reported in the prior-year period.
Total sales rose 8.5% to $3,588.6 million and beat the Zacks Consensus Estimate of $3,534 million, driven by 3% increase in comparable-store sales (comps). Notably, sales and comps growth surpassed the company’s projected rise of 6-7% and 1-2%, respectively. Comps growth can primarily be attributed to the rise in traffic and increased average basket size.
Cost of sales increased 8.2% to $2,522.2 million and 20 basis points (bps) as a percentage of sales. The increase was driven by 30 bps rise in merchandise margin, 15 bps decline in distribution costs and 15 bps leverage in occupancy expenses. However, these were partly offset by higher freight expenses and buying costs. Selling, general and administrative expenses increased 25 bps due to higher wage-related costs.
Operating margin contracted 5 bps to 15.1% as higher freight costs and wage-related investments more than offset the improved merchandise margins and favorable timing of packaway-related expenses. However, operating margin outperformed the company’s expectation of 14.6-14.8%.
Ross Stores remains on track with its store expansion plans by opening 23 Ross and six dd’s DISCOUNTS stores in first-quarter fiscal 2018. As of May 5, 2018, Ross Stores operated 1,651 outlets, including 1,432 Ross Dress for Less stores and 219 dd's DISCOUNTS stores.
In second-quarter fiscal 2018, Ross Stores plans to open 30 stores, including 22 Ross and eight dd’s DISCOUNT outlets. For fiscal 2018, total store openings are estimated to be 100, with 75 Ross and 25 dd's DISCOUNTS locations. This guidance does not include the company’s plans to close or relocate nearly 10 older stores.
Ross Stores ended first-quarter fiscal 2018 with cash and cash equivalents of $1,302.8 million, long-term debt of $312.1 million and total shareholders’ equity of $3,130.3 million.
During the reported quarter, the company bought back 3.3 million shares for $255 million. Further, the company remains on track to repurchase shares worth $1.075 billion in fiscal 2018. Additionally, it approved a quarterly cash dividend of 22.5 cents per share. The increased dividend is payable on Jun 29, to shareholders of record as of Jun 12.
Ross Stores remains encouraged by strong earnings and sales in first-quarter fiscal 2018. It expects retail environment at both online and physical stores to be highly competitive throughout 2018. Further, it projects strong multi-year sales comparisons as the year progresses. Despite competition and strong comparisons, the company anticipates retaining its robust performance due to the strength in the apparel space.
However, the company provided a softer-than-expected earnings view for the second quarter of fiscal 2018. It expects comps to increase 1-2% while earnings per share are projected to be 95-99 cents, including the benefit from lower taxes, partly offset by the shift in packaway-related expenses. Earnings guidance is significantly below the Zacks Consensus Estimate of $1.02 per share.
Other assumptions include sales growth of 5-6% in the fiscal second quarter. Anticipating comps in line with the guidance, the company projects operating margin to be 13.3-13.5%, reflecting a decline from 14.9% in the year-ago quarter. This decline is mainly attributed to the unfavorable timing of pack away related costs, and the company’s already announced wage and benefit investments. Net interest expenses are estimated at about $900,000 while the tax rate is expected to decline to nearly 24-25%.
Based on the solid fiscal first-quarter results and the second-quarter view, the company raised its earnings outlook for fiscal 2018. It projects earnings per share for fiscal 2018 of $3.92-$4.05 compared with the previous guidance of $3.86-$4.03 and $3.55 per share reported in fiscal 2017. Earnings guidance includes the benefit from lower taxes.
The company previously projected comps growth of 1-2% for fiscal 2018 compared with 4% growth registered in each of the last three years. Also, it projected sales growth of 3-4% in fiscal 2018.
Zacks Rank and Key Picks
Ross Stores currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the retail space include The Buckle Inc. (BKE - Free Report) , Urban Outfitters Inc. (URBN - Free Report) and Dollar General Corp. (DG - Free Report) . While Buckle and Urban Outfitters carry a Zacks Rank #1 (Strong Buy), Dollar General sports a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Buckle surged 15.2% in the last three months and posted positive earnings surprise of nearly 9.1% in the trailing four quarters.
Urban Outfitters delivered a positive earnings surprise of nearly 19.8% in the trailing four quarters and has long-term growth rate of 12%.
Dollar General delivered a positive earnings surprise of 2.3% in the trailing four quarters and has long-term growth rate of 14.6%.
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