Stores (ROST 77.06, -5.90, -7.11%) is trading lower today after reporting Q1 (Apr) earnings results
and guidance last night. In case you're not familiar, Ross Stores operates Ross
Dress for Less, the largest off-price apparel and home fashion chain in the US
with 1,432 locations in 38 states. It sells name brand apparel, accessories,
footwear, and home fashions at everyday savings of 20% to 60% off department
store prices. In 17 states ROST also operates 219 dd's DISCOUNTS that feature a
more moderately-priced assortment that are 20-70% off department stores. ROST
is based near San Francisco and its stores are primarily in the western and
southern US but it's expanding to all regions.
Ross Stores are very similar to TJ Maxx and Marshalls. ROST notes that it's the largest player in this space in the US with 1,400+ stores. While it is true that the Ross for Less chain is the biggest single off-price banner in the US, TJX Cos owns both T.J. Maxx (1,231 US stores) and Marshalls (1,073 US stores) which together are much larger. Plus, TJX operates nearly 700 HomeGoods stores in the US. Another difference is that ROST operates solely in the US while TJX has some pretty substantial international operations (mostly Europe where they are known as TK Maxx instead of TJ Maxx).
Turning to the AprQ results, EPS rose 35% year/year to $1.11, which was above the $1.03-1.07 prior guidance. There is some confusion about what the clean EPS number is though. GAAP EPS was $1.11, however, some services are backing out $0.19 in benefits ($0.17 from lower taxes and $0.02 from packaway-related expenses). Backing these items out would have caused a big miss. We disagree that they should be backed out.
We think the $1.11 or perhaps $1.09 is the comparable number to the prior guidance of $1.03-1.07 and thus it is a beat. This is based on commentary in the press release saying "we achieved above-plan growth in both sales and earnings in the first quarter." Also, ROST's guidance includes the tax benefits which makes us think the $1.11 or $1.09 is the correct number. However, it's not entirely clear which is comparable to guidance.
Revenue rose 8.5% year/year to $3.59 bln, which is above prior guidance of $3.50-3.54 bln. Same store comps were +3% vs prior guidance of +1-2%. Looking forward, ROST has guided to Q2 (Jul) EPS of $0.95-0.99, which is below market expectations. They are also guiding to same store comps of +1-2% in JulQ.
On the call, ROST estimated that unfavorable weather reduced comps by 1%, so it would have been +4%. Every major region had negative weather comparisons during the quarter with one exception in the Pacific Northwest. The areas that were impacted the most were the Mid-Atlantic and also the Midwest. Operating margin was down slightly from the prior year as an improvement in merchandise gross margin and favorable planning of packaway-related expenses were offset by higher freight costs and wage-related investments.
In sum, the stock seems to be down on the EPS confusion we mention above, but we think it was actually an upside quarter. The weakness in the stock seems more related to the weak JulQ guidance. Over the longer term, ROST is confident the off-price sector will remain a strong performing segment of retail as consumers continue to seek value.
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