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Are Strategies Safeguarding Ross Stores' Long-Term Growth?

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Ross Stores Inc’s (ROST - Free Report) off-price business model, commitment toward better price management, merchandise initiatives, cost-containment efforts and store-expansion plans have been its key growth drivers. Moreover, the company’s robust surprise trend, for both top and bottom lines, has boosted investors’ confidence in the stock.

This has led to an upsurge in the stock price, which is trading close to its 52-week high. The stock has rallied 47.2% in the past year, outperforming the industry’s growth of 35.5%.

Factors Supporting Ross Stores’ Growth

Ross Stores’ proven off-price business model, which provides competitive bargains, continues to make its stores an attractive destination for customers. The off-price model also offers strong value proposition and micro-merchandising that drive better product allocation and margins. Further, as part of its merchandising initiatives, the company constantly upgrades systems and processes to enhance productivity and improve its merchandise assortments for driving the top line.

We observed that the company's total sales increased 8.5% in first-quarter fiscal 2018, with comparable store sales (comps) growth of 3%. Historically, sales have increased 7%, 7.9%, 7.8% and 16% in the first, second, third and fourth quarters of fiscal 2017, respectively, while comps increased 3%, 4%, 4% and 5% in the respective quarters.

Moreover, the company has a positive record of earnings and sales surprises in the trailing eight quarters. In first-quarter fiscal 2017, both top and bottom lines beat estimates and improved year over year. Earnings gained from ongoing success in delivering broad assortments of compelling bargains to value-focused customers. Meanwhile, sales growth was driven by broad-based strength across major merchandise categories and robust comps growth.

Additionally, Ross Stores remains on track with its store-expansion program that targets operating 2,500 stores over the longer term, comprising 2,000 Ross and 500 dd’s DISCOUNTS stores. Notably, Ross Stores opened 23 Ross and six dd’s DISCOUNTS stores in first-quarter fiscal 2018, which was in line with the company’s target. 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.

Why Stock Growth Slowed After Q1 Earnings?

We note that this Dublin, CA-based company has gained just 2.4% since May 24, mainly due to its softer-than-expected view for second-quarter fiscal 2018. Meanwhile, the industry witnessed an increase of 4.3%.

Though strong earnings and sales trends are encouraging, the company believes that challenging multi-year comparisons and the competitive retail landscape can be a threat to performance. The company’s earnings per share projection of 95-99 cents for the fiscal second quarter was significantly below analysts’ expectations. Earnings are anticipated to be negatively impacted by the shift in packaway related expenses.

Further, operating margin is likely to disappoint, with a projection of 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.

Furthermore, Ross Stores projects higher freight costs, which is likely to weigh on its operating performance. 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. Driver shortages, impacts of increased regulation and the stronger economy were the reasons behind the tight capacity.

Diesel costs increased nearly 20% in the fiscal first quarter compared with the prior-year quarter. Consequently, the company expects headwinds, related to higher freight costs, to persist throughout fiscal 2018, which is also reflected in its guidance.

Estimate Revisions

Driven by the soft near-term view, analysts’ projections for the next two quarters have moved south. However, estimate revisions for fiscal 2018 and 2019 remain encouraging. In the last 30 days, the company’s Zacks Consensus Estimate of $1.00 and 87 cents for the fiscal second and third quarter declined by 2 cents and a penny, respectively. On the other hand, estimates for fiscal 2018 and fiscal 2019 improved by 2 cents each to $4.05 and $4.47, respectively.

Bottom Line

While the company’s near-term outlook surely reflects softness in the upcoming quarter, the above-mentioned strategies clearly profess that Ross Stores still has significant growth potential in the long term. Further, a VGM Score of A and long-term earnings growth rate of 10% reflect the growth potential of the stock. Thus, we would suggest holding on to this Zacks Rank #3 (Hold) stock.

Looking for More Trending Picks? Look at These

Some better-ranked stocks in the retail space are Burlington Stores Inc. (BURL - Free Report) , The Buckle Inc. (BKE - Free Report) and Fossil Group Inc. (FOSL - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Burlington Stores has pulled off an average positive earnings surprise of 17.8% in the last four quarters. The company has long-term earnings growth rate of 18.1%.

Buckle, which has returned 58.2% in the past year, has delivered an average positive earnings surprise of 9.7% in the trailing four quarters.

Fossil Group has long-term earnings growth rate of 5%. Further, the company’s earnings have outpaced the Zacks Consensus Estimate in each of the trailing four quarters, with the average beat of 54.1%.

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