Ross Stores (ROST 95.29, +0.26, +0.27%), after initially seeing weakness following
its report of Q2 (Jul) earnings results/guidance last night, has recovered off of its lows to trade mostly flat to slightly up overall.
Among the latest stocks to weigh in from the apparel retail sector, which has been bustling with earnings activity in the back half of August, Ross Stores operates Ross Dress for Less, the largest off-price apparel and home fashion chain in the U.S. with 1,453 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. ROST also operates 227 dd's DISCOUNTS stores in 18 states. These feature a more moderately-priced assortment of attire sold at 20 to 70% off department store prices. ROST is based near San Francisco, and its stores can be found primarily in the western and southern U.S., but it's expanding to all regions.
Ross Stores is similar to T.J. Maxx and Marshalls, as they are all off-price retailers focused on sales of apparel and adjacent categories. ROST notes that it, numbering at more than 1,400 U.S. locations, is the largest player in this space domestically. While this is technically true, both T.J. Maxx (1,236 U.S. stores) and Marshalls (1,077 U.S. stores) are owned by TJX Cos, and the combination of the two chains within the TJX Cos family sums to a larger store count than Ross Stores’ count overall. Plus, TJX’s total increases still further if you look beyond the apparel-focused category and count in the 700+ HomeGoods stores that it operates in the U.S. Furthermore, ROST operates solely in the U.S. while TJX has some pretty substantial international operations (principally in Europe, where they are known as T.K. Maxx instead of T.J. Maxx). Overall, TJX is much larger, but it is true that the Ross Dress for Less chain is the biggest single off-price banner in the US.
Turning to the JulQ results, EPS rose 27% year/year to $1.04, which was above prior guidance of $0.95-0.99. Revenue rose 8.9% year/year to $3.74 bln, which was above market expectations. Same store comps were +5% vs prior guidance of +1-2%. Looking forward, ROST guided for Q3 (Oct) EPS of $0.84-0.88, which is roughly in-line with market expectations, although the mid-point of guidance is a bit below expectations. They are also reaffirmed OctQ same store comps of +1-2%. Looking a bit further out, ROST guided to Q4 (Jan) EPS of $1.02-1.07, which is below market expectations. However, they did reaffirm Q4 comps guidance of +1-2%.
In addition to earnings, ROST also raised its long-term projected store potential to 3,000 locations, up from 2,500. This is based on internal research that indicates ROST can now further increase penetration in both existing and new markets. Breaking it down by segment, the company now believes that Ross Dress for Less can grow to about 2,400 locations, up from its prior target of 2,000. Its dd's DISCOUNTS target was upped to 600 stores from 500. This is some nice growth potential relative to its current store base of 1,453 Ross Dress for Less stores and 227 dd's DISCOUNTS locations.
On the call last night, ROST says it saw broad-based strength across merchandise categories and geographic markets. Its +5% comps were driven by higher traffic and an increase in the average basket. While JulQ operating margin of 13.8% was down 110 bp year/year, it was better than forecast. Looking ahead, Q3 operating margin is projected to be in the range of 11.9-12.1%, down from last year's 13.3%. This decline reflects ROST's expectation for ongoing pressure this year from higher freight and wage investments, as well as some deleveraging on occupancy and other expenses if comps only perform in-line with guidance.
Looking ahead to the balance of the year, ROST hopes to once again outperform projections as it has done for some time now. However, ROST faces stronger prior-year comparisons over the next six months in the retail landscape, considering both brick-and-mortar and online operations, which will likely remain very competitive.
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