Ross Stores (ROST) Q1 Earnings Beat, Sales Miss Hurts Stock

Ross Stores, Inc. (NASDAQ:ROST) has reported strong first-quarter fiscal 2019 results, wherein earnings beat estimates while sales missed. The company’s operating profit margin continued to be impacted by higher freight costs. Further, it expects headwinds related to higher freight costs to persist in fiscal 2019.

Shares of Ross Stores declined nearly 3% in the after-hours session. This decline may be attributed to lower-than-expected sales due to issues in the ladies apparel category and continued soft margins. However, this Zacks Rank #3 (Hold) stock has surged 13.6% year to date, underperforming the industry’s 16.4% growth.

Q1 Highlights

Ross Stores posted earnings of $1.15 per share, which beat the Zacks Consensus Estimate of $1.12 and surpassed the company’s guidance of $1.05-$1.11. Further, earnings increased nearly 3.6% from $1.11 reported in the prior-year period.

Total sales rose 6% to $3,796.6 million but missed the Zacks Consensus Estimate of $3,806 million. Comparable-store sales (comps) improved 2% on the back of increased average basket size. Comps were also in line with the company’s guidance of flat to up 2%. Further, comps gained from strength in the men’s category, offset by softness in ladies apparel. Midwest was the best performing region.

Cost of goods sold (COGS) increased 7.1% to $2,701.7 million. As a percentage of sales, COGS increased 85 basis points (bps) due to higher freight costs, distribution expenses, and buying and occupancy costs, partly offset by increase in merchandise margins. Selling, general and administrative expenses increased 6.5% to $558.3 million and 10 bps as a percentage of sales, owing to higher wages.

Operating margin of 14.1% in the reported quarter declined about 95 bps from the prior-year quarter. This contraction is attributed to higher COGS and freight costs, offset by increased merchandise margin and favorable timing of expenses.

Store Update

As of May 4, 2019, Ross Stores operated 1,745 outlets — including 1,502 Ross Dress for Less stores and 243 dd's DISCOUNTS stores.

In the fiscal second quarter, the company expects to open 28 stores, including 22 Ross and 6 dd’s DISCOUNTS stores. In fiscal 2019, it anticipates opening 100 stores, including 75 Ross Dress for Less and 25 dd’s DISCOUNTS outlets. This does not include its planned closure or relocation of nearly 10 older stores.

Financials

Ross Stores ended the fiscal first quarter with cash and cash equivalents of $1,366.6 million, long-term debt of $312.5 million, and total shareholders’ equity of $3,267.6 million.

In the reported quarter, the company repurchased 3.4 million shares for nearly $320 million. It is now on track to repurchase shares worth $1.275 billion in fiscal 2019.

Guidance

In second-quarter fiscal 2019, the company anticipates comps to be up 1-2%. Total sales are estimated to increase 5-6%. Operating margin is projected at 13.2-13.4%, whereas it recorded 13.8% in the prior-year quarter. This decline is likely to result from higher wage and freight costs, partially offset by last year's negative impact of pack-away timing. Further, it expects occupancy deleverage in the fiscal second quarter.

Consequently, the company envisions earnings per share of $1.06-$1.11 compared with $1.04 recorded in the prior-year quarter.

Driven by fiscal first-quarter results and expectations for the second quarter, Ross Stores raised its earnings view for fiscal 2019. It now estimates earnings per share of $4.38-$4.52 compared with $4.30-$4.50 mentioned earlier.

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