Ross Stores (ROST) Q3 Earnings & Sales Beat, 2021 View Up

Ross Stores, Inc. ROST reported solid results for third-quarter fiscal 2021 wherein both the top and the bottom line beat the Zacks Consensus Estimate and improved year over year. Also, results outpaced management’s expectations and benefited from robust customer demand.

ROST provided a two-year comparison for all metrics as the pre-pandemic period reflects a more precise comparison base due to the closure of stores through most of fiscal 2020. Shares of this currently Zacks Rank #3 (Hold) Ross Stores have gained 15.9% in the past six months compared with the industry’s growth of 10.1%.

Q3 Insights

Ross Stores reported earnings of $1.09 per share, up 5.8% from $1.03 reported in the third quarter of fiscal 2019. The figure surpassed the Zacks Consensus Estimate of 79 cents.

Total sales of $4,574.5 million improved 19% from the level achieved in third-quarter fiscal 2019 and beat the Zacks Consensus Estimate of $4,371 million. Sales benefited from broad-based growth across certain merchandise categories and regions as well as robust comparable store sales (comps). The children and men's categories, and the Midwest and Southeast regions were the outperformers. Sales trends were also robust at the dd's DISCOUNTS business.

Comps increased 14% in the fiscal third quarter owing to higher average basket size with a slight decrease in traffic trends from the fiscal 2019 actuals.

Ross Stores, Inc. Price, Consensus and EPS Surprise

Ross Stores, Inc. Price, Consensus and EPS Surprise

Ross Stores, Inc. price-consensus-eps-surprise-chart | Ross Stores, Inc. Quote

Cost of goods sold (COGS) rose 20.2% from the level in third-quarter fiscal 2019 to $3,326 million. As a percentage of sales, COGS increased 85 basis points (bps). Also, domestic freight expenses rose 125 bps. We note that elevated ocean freight costs hurt merchandise margins that declined 40 bps while buying costs also increased 10 bps. Higher expenses were somewhat offset by leveraged occupancy and distribution of 65 and 25 bps, respectively.

Selling, general and administrative (SG&A) expenses increased 20% from the third-quarter fiscal 2019 tally to $725.8 million. SG&A, as a percentage of sales, increased 15 bps to 15.9% as the gain from robust sales was offset by pandemic-led expenses and elevated incentive costs. Ross Stores recorded net COVID-related expenses of roughly 35 bps in the third quarter, the majority of which impacted SG&A expenses.

Although the operating margin of 11.4% was better than management’s projection, the same declined from the third-quarter fiscal 2019 reading as higher sales were partly offset by higher expenses in relation to freight, wage, and COVID-related costs.

Store Update

Ross Stores completed its expansion program for fiscal 2021 by introducing 18 Ross and 10 dd's DISCOUNTS stores during the reported quarter. For the current fiscal year, management added 65 locations, including 44 Ross and 20 dd’s DISCOUNTS. It plans to shut down one store by this year-end.

Management intends to open about 100 stores in fiscal 2022.

Financials

Ross Stores ended the quarter with cash and cash equivalents of $5,259.6 million, long-term debt of $2,451.3 million and total shareholders’ equity of $3,983.2 million.

As of the end of the fiscal third quarter, consolidated inventories increased 3% while average selling store inventory decreased 1% from the respective fiscal 2019 levels. Packaway levels were at 31% compared with 39% at the end of third-quarter fiscal 2019.

The lower packaway levels resulted from the usage of a substantial amount of packaway for ahead of planned sales. Delays in receipts due to supply-chain congestion also induced lower packaway levels.

In third-quarter fiscal 2021, Ross Stores bought back 2.1 million shares for $241 million. ROST is on track to repurchase shares worth $650 million in fiscal 2021.

Outlook

Per management, there is greater uncertainty about the worsening of industry-wide supply-chain congestion as Ross Stores enters the holiday season. ROST’s fiscal 2021 guidance reflects comparisons with the respective fiscal 2019 forecasts.

Ross Stores expects comps to increase 7-9% while the overall sales are expected to grow 10-13% for the fourth quarter of fiscal 2021. Earnings per share are envisioned in the band of 83-93 cents for the same quarter. Operating margin is projected to be 8.1-8.8%.

The expectation takes into account persistent pressures from supply-chain issues along with holiday pay incentives across ROST’s stores and distribution centers. Ross Stores also anticipates COVID-related costs to affect EBIT margins by nearly 30 bps. Net interest expense is estimated at $18 million while the tax rate is expected to be 22-23%.

Backed by the robust year-to-date performance and a favorable fiscal fourth-quarter view, ROST updated its guidance for fiscal 2021. Comps are likely to increase 12-13%, suggesting an increase from the earlier envisioned view of 10-11% growth. Ross Stores now expects earnings per share of $4.65-$4.75 per share compared with $4.20-$4.38 predicted earlier. It delivered earnings of $4.60 in fiscal 2019.

Stocks to Consider

We highlighted three better-ranked stocks in the Retail - Wholesale sector, namely Boot Barn Holdings BOOT, Tractor Supply Company TSCO and Costco COST.

Boot Barn Holdings, the lifestyle retailer of western and work-related footwear, apparel and accessories, sports a Zacks Rank #1 (Strong Buy), currently. Shares of BOOT have jumped 84.5% in the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Boot Barn Holdings’ current-year sales and earnings per share (EPS) suggests growth of 54.4% and 183.3%, respectively, from the year-ago period’s reported figures. BOOT has a trailing four-quarter earnings surprise of 35.3%, on average.

Tractor Supply Company, a rural lifestyle retailer in the United States, flaunts a Zacks Rank of 1 at present. TSCO has a trailing four-quarter earnings surprise of 22.8%, on average. The stock has rallied 26.9% in the past six months.

The Zacks Consensus Estimate for Tractor Supply Company’s current-year sales and EPS suggests growth of 19% and 23.9%, respectively, from the year-ago period’s reported numbers. TSCO has an expected EPS growth rate of 9.6% for three-five years.

Costco, which operates membership warehouses, presently carries a Zacks Rank #2 (Buy). COST has a trailing four-quarter earnings surprise of 7.7%, on average. Shares of the same have surged 37.8% in the past six months.

The Zacks Consensus Estimate for Costco’s current-year sales and EPS suggests growth of 9.6% and 9.7%, respectively, from the year-ago period’s levels. COST has an expected EPS growth rate of 8.6% for three-five years.

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