Ross Stores (ROST 85.79, -5.40, -5.92%) is participating in the today’s overall weak
retail picture. A number of retailers are trading lower on disappointing Q3
(Oct) results and Ross Stores is no exception. Ross Stores operates Ross Dress for Less, the largest
off-price apparel and home chain in the US. It sells name brand apparel, accessories,
footwear and home fashions. Ross Stores is very similar to TJ Maxx and
Marshalls. ROST also operates dd's DISCOUNTS.
Turning to the OctQ results, EPS rose 26% yr/yr to $0.91, which was above prior guidance of $0.84-0.88. Revenue rose 6.6% yr/yr to $3.55 bln, which was in-line with market expectations. Same store comps were +3% vs prior guidance of +1-2%. Operating margin of 12.4% was down from last year as the higher merchandise margin was more than offset by increases in freight costs and this year's wage investments. In terms of guidance, ROST reaffirmed prior EPS guidance for Q4 (Jan) at $1.02-1.07 (excluding a tax benefit), which is a bit below market expectations. ROST also reaffirmed Q4 comps guidance of +1-2%.
ROST does not provide a lot of color in the press release. However, they do say that as the company enters this year's holiday season, not only are they up against their toughest sales comparisons from 2017, but ROST is also expecting another fiercely competitive retail environment. If you're interested, they are holding a call at noon ET.
Like a lot of other retailers, ROST sounds a bit cautious about the upcoming holiday season. This is the longest holiday season possible with Nov 22 being the earliest possible day for Thanksgiving. ROST seems concerned about this holiday season being another highly competitive season. Retailers seem to say that every holiday season but with online competition increasing pressure on the brick-and-mortar retailers more each year, the concern is valid.
The good news is that ROST is off its lows, but most retail stocks are under pressure today. Our overall take on the retail earnings reports this morning is that there is some concern about how robust sales will be this holiday season. When a bellwether like Target (TGT) is down 10% today, following a big drop in Wal-Mart (WMT -2%) last week, that's not a good sign. Department stores like Kohl's (KSS -10%) and The TJX Companies (TJX -2%) are also showing weakness today.
Overall, we are concerned heading into this holiday season. Despite low unemployment, consumers seem to be holding back on spending due to rising interest rates and concerns about the rate impact on home prices. It will be interesting to see how this holiday season develops, but we would be cautious. There have been enough weak reports to make us nervous.
The good news is that perhaps a retail stock sell-off will create some value buys in early 2019. Some retailers had gotten a little ahead of the fundamentals, but a weak holiday season could put these names back on sale in the new year.
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