Ross Stores Inc. (ROST - Free Report) is one of those few retailers that have shown resilience in a tough industry backdrop amid changing consumer preferences. The company displays a robust surprise trend, having delivered earnings and sales beat in nine consecutive quarters. Further, a strong outlook for fiscal 2018 and impressive long-term strategies position the company well for growth in the coming quarters.
However, the company continues to grapple with higher freight and wage-related costs, which are hurting margins.
Let’s analyze the pros and cons of Ross Stores.
Merchandising Initiatives Bode Well
Merchandising measures — including investments in workforce, processes and technology — are the core of Ross Stores’ strategies, which keep it on growth trajectory. The company has been committed to improving merchandise assortments in the ladies’ apparel business. Moreover, it constantly organizes its merchant group, enabling it to expand market coverage steadily in the vendor community while enhancing relationships with broad network of existing and new resources. These initiatives strengthen Ross Stores’ buying operation, facilitating the purchase of in-trend merchandise at attractive prices.
Off-Price Model Boosts Top and Bottom Lines
The company’s off-price model provides strong value proposition and micro-merchandising that drive product allocation and margins. This helped the company to deliver solid top- and bottom-line trends. Additionally, this provides an edge over competition from other discount retailers like Dollar General (DG - Free Report) , Target (TGT - Free Report) and Dollar Tree (DLTR - Free Report) .
We observe that the company's total sales increased 8.9% in second-quarter fiscal 2018, with comparable store sales (comps) growth of 5%. Historically, sales increased 8.5% in first-quarter fiscal 2018. Moreover, it increased 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. Also, comps improved 3%, 4%, 4% and 5% in the first, second, third, and fourth quarters of fiscal 2017, respectively.
Based on results of the first half and view for the second half, Ross Stores raised earnings outlook for fiscal 2018. It now projects earnings per share of $4.01-$4.10 for fiscal 2018 compared with $3.92-$4.05 mentioned earlier. Comps for fiscal 2018 are estimated to increase 1-2%.
Store Expansion on Track
Ross Stores has consistently been on track with its store expansion plans. This is clear from the opening 40 stores in September and October, including 30 Ross Dress For Less and 10 dd's DISCOUNTS stores. These store openings mark Ross Stores’ expansion in 19 different states in new and existing markets. Further, this marks the completion of the planned target of opening 100 stores in fiscal 2018, including 75 Ross and 25 dd’s DISCOUNTS stores. Currently, it operates nearly 1,500 Ross stores and more than 230 dd’s DISCOUNTS 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 long-term projected store growth target to 3,000 from 2,500 stated earlier. 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).
Headwinds Plaguing the Stock
While top- and bottom-line trends are robust, Ross Stores continues to grapple with higher freight and wage-related costs, which are hurting margins. 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, owing to driver shortages, impacts of increased regulation and the stronger economy.
Further, the company expects headwinds related to higher freight costs and wage investments to persist throughout fiscal 2018, which is well reflected in its guidance. Driven by these factors, as well as a slight deleverage in occupancy and other expenses, the company projects operating margin of 11.9-12.1% for the fiscal third quarter, reflecting a decline from 13.3% in the year-ago quarter.
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