Ross Stores (ROST) is trading sharply higher today (+11%) after reporting Q2 (Jul) earnings results last night that came in better than expected. 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 1,384 locations in 37 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 205 dd's DISCOUNTS in 16 states 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 nearly 1,400 stores. That is true but TJX Cos owns both T.J. Maxx (1,194 US stores) and Marshalls (1,043 US stores) which would make them much larger if you added both chains together. Plus, TJX operates 600+ HomeGoods stores in the US. Furthermore, 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). Overall, TJX is much larger but it is true that the Ross for Less chain is the biggest single off-price banner in the US.
Turning to the JulQ results, EPS rose 15.5% YoY to $0.82, which was well above the $0.73-0.76 prior guidance. Revenue rose 7.9% year/year to $3.43 bln, which also was above market expectations. Same store sales comps in JulQ were +4% which was better than prior guidance of +1-2% and was a small uptick from +3% in AprQ. These were nice comps despite lapping a fairly tough +4% comp last year. Operating margin of 14.9% outperformed internal projections, mainly due to a combination of higher merchandise margin and leverage on above-plan sales gains.
In terms of guidance for Q3 (Oct), ROST expects EPS to come in around $0.64-0.67, the mid-point of which is below market expectations although ROST tends to be conservative with guidance. OctQ same store comps are expected to be up +1-2%. For the full year, ROST now expects EPS of $3.16-3.23, up from prior guidance of $3.07-3.17.
On the call ROST talked about how merchandise margin was up 35 basis points, driven by a combination of better buying and the ability to exceed its initial sales plan. There is also markdown leverage and that helps the company move to drive the business with closeouts. So that was beneficial in JulQ.
In sum, ROST had a very good JulQ report despite the challenging external environment. Looking ahead to the second half, ROST says it realizes that it faces its most challenging prior-year comparisons and a volatile retail backdrop. So while it hopes to do better, ROST believes it's prudent to maintain a somewhat cautious outlook for the balance of this year, which is reflected in the 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.