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Can Growth Strategies Aid Ross Stores Despite Cost Concerns?

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Ross Stores Inc. (ROST - Free Report) stock has been consistently doing well, courtesy of its commitment toward better price management, merchandise initiatives, cost containment and store expansion. These factors have not only aided the stock performance in a year’s time but also helped the company deliver a positive record of earnings and sales surprises consistently for the trailing nine quarters.

The company’s stock price, which currently hovers close to its 52-week high, has increased 66.4% in the past year, outperforming the industry’s 46.8% growth. Additionally, this Zacks Rank #3 (Hold) stock has gained 2.5% since reporting better-than-expected second-quarter fiscal 2018 results on Aug 23.

 



In second-quarter fiscal 2018, 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. Based on the results in the first half and the view for the second half, the company has raised earnings outlook for fiscal 2018.

Ross Stores, Inc. Price, Consensus and EPS Surprise

 

Ross Stores, Inc. Price, Consensus and EPS Surprise | Ross Stores, Inc. Quote

Estimate Trend Up

Driven by the robust earnings outlook, analysts remain optimistic about the stock. This is quite evident from the uptrend in earnings estimates over the last 30 days. The Zacks Consensus Estimate of 89 cents and $4.11 for third-quarter and fiscal 2018 moved north by 2 cents and 6 cents, respectively. Management envisions earnings per share of $4.01-$4.10 for fiscal 2018 compared with the previous guidance of $3.92-$4.05. Comps for fiscal 2018 are estimated to increase 1-2%.

Strategies Supporting Ross Stores’ Growth

A key strategy of Ross Stores to keep itself on the growth trajectory is continued focus on merchandising organization through investments in workforce, processes and technology. It constantly fine tunes, and upgrades its systems and processes to enhance productivity. The company regularly organizes its merchant group, enabling it to steadily expand market coverage in the vendor community while enhancing relationships with a broad network of existing and new resources. These initiatives strengthen Ross Stores’ buying operation, facilitating the purchase of in-trend merchandise at attractive prices.

Ross Stores remains on track, with respect to its store expansion plans. This is clear from 22 Ross and eight dd’s DISCOUNTS stores, opened in second-quarter fiscal 2018. Moreover, the company plans to open nearly 40 stores, including 30 Ross and 10 dd’s DISCOUNTS in third-quarter fiscal 2018. With this, it is poised to reach the target of opening 100 stores in fiscal 2018, including 75 Ross and 25 dd’s DISCOUNTS stores. However, this guidance does not include the company’s plans to close or relocate nearly 10 older stores.

Further, the company’s focus on store expansion is highlighted by its recent research, which suggests that it has the potential to increase penetration in the existing as well as new markets. Consequently, it raised the long-term projected store growth target to 3,000 from the prior guidance of 2,500. This will include the opening of nearly 2,400 Ross Dress for Less stores (up from the prior forecast of 2,000) and 600 dd’s DISCOUNTS stores (up from the prior assessment of 500).

Moreover, Ross Stores’ proven off-price business model, along with competitive bargains, continues to make its stores an attractive destination for customers. The decisions of the company, regarding merchandising, purchasing, pricing and the location of stores, are made keeping in mind the customer base. It has a proven business model as the competitive bargains it offers continue to make its stores attractive destinations for customers in all economic scenarios. Moreover, the off-price model offers strong value proposition and micro-merchandising that drive better product allocation and margins. We believe this will help sustain the company’s top-line growth trend.

Notably, Ross Stores’ total sales increased 8.9% in second-quarter fiscal 2018, with comparable store sales (comps) growth of 5%. Historically, sales have increased 8.5% in first-quarter fiscal 2018 and 7%, 7.9%, 7.8% and 16% in the first, second, third and fourth quarters of fiscal 2017, respectively. Moreover, comps increased 3% in first-quarter fiscal 2018, and 3%, 4%, 4% and 5% in the first, second, third and fourth quarters of fiscal 2017, respectively.

Possible Deterrents

Ross Stores continues to grapple with higher freight costs and wage-related investments, which are hurting operating margin lately. 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, as a result of driver shortages, impacts of increased regulation and the stronger economy.

The company expects these headwinds, along with slight deleverage in occupancy and other expenses, to result in soft operating margin for the fiscal third quarter. It projects operating margin of 11.9-12.1% in the fiscal third quarter, reflecting a decline from 13.3% in the year-ago quarter.

Interested in Solid Retail Stocks, Count on These

Burlington Stores, Inc. (BURL - Free Report) has a long-term earnings growth rate of 20.2% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Target Corp. (TGT - Free Report) has pulled off an average positive earnings surprise of nearly 1.3% in the last four quarters and has a long-term earnings growth rate of 6.7%. The company carries a Zacks Rank #2.

The TJX Companies Inc. (TJX - Free Report) has an impressive long-term earnings growth rate of 10.6%. The company has delivered a positive earnings surprise of 7.3% and it presently carries a Zacks Rank of 2.

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