Ross Stores (ROST) Q2 Earnings Beat, Higher Costs Hurt Stock


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Ross Stores, Inc. (ROST Quick QuoteROST ) reported solid results for second-quarter fiscal 2021, wherein both the top and bottom line beat the Zacks Consensus Estimate and also advanced year over year. Results reflect robust customer demand, accelerated vaccination rates, government stimulus payments and easing of COVID-19 restrictions.

The company provided a two-year comparison for all metrics as the pre-pandemic period reflects more precise comparison base due to the closure of stores through most part of fiscal 2020.

Shares of the company declined 4.7% in after-hour session on Aug 19. The shares declined despite the robust second-quarter fiscal 2021 performance. Probably, investors were not pleased with the uncertainty surrounding the sustainability of the external factors aiding the results and the impacts of the industry-wide supply chain congestion, which are likely to persist.


Shares of the Zacks Rank #2 (Buy) company have gained 37.6% in the past year compared with the industry’s growth of 36%.

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Ross Stores reported earnings of $1.39 per share, up 22% from $1.14 per share reported in the second-quarter of fiscal 2019. The figure surpassed the Zacks Consensus Estimate of $1.00.

Total sales of $4,805 million improved 20.7% from second-quarter fiscal 2019 and beat the Zacks Consensus Estimate of $4,557.1 million. Sales benefited from broad-based growth across all merchandise categories and regions. The Children’s category and Midwest region were outperformers. Sales trends also remained robust at the dd’s DISCOUNTS business.


Comparable store sales (comps) improved 15% in the fiscal second quarter owing to higher average basket size, with a slight increase in traffic trends compared with the fiscal 2019 period.

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 19.9% to $3,410.9 million. As a percentage of sales, COGS contracted 50 basis points (bps) to 71% compared with 71.5% in the second quarter of fiscal 2019. COGS rate benefited from improved merchandise margins, occupancy and lower buying costs, offset by higher distribution costs and worsening industry-wide supply chain congestion, leading to higher freight expenses.


Merchandise margins and occupancy increased 80 bps each, while buying costs declined 10 bps. Distribution expenses rose 40 bps on wage increases and freight cost increase of 85 bps.

Selling, general and administrative (SG&A) expenses increased 21% from second-quarter fiscal 2019 to $717.8 million. SG&A, as a percentage of sales, increased 5 bps to 14.9% owing to elevated operating expenses associated with the pandemic and higher incentives, offset by strong sales performance. The company recorded net COVID-related expenses of roughly 45 bps in the second quarter, majority of which impacted SG&A expenses.


Operating margin improved substantially from second-quarter fiscal 2019 to 14.1% on strong sales, offset by higher expenses related to freight, wage, and COVID-related costs.

Store Update

In fiscal 2021, the company now expects opening nearly 65 new locations, including 45 Ross Dress for Less and 20 dd’s DISCOUNTS. It plans to shut down or relocate nearly 10 older stores.

The company also intends to open about 100 stores in fiscal 2022. Management anticipates opening 28 stores in third-quarter fiscal 2021, including 18 Ross Dress for Less and 10 dd’s DISCOUNTS stores.


Financials

Ross Stores ended the quarter with cash and cash equivalents of $5,569.1 million, long-term debt of $2,450.2 million and total shareholders’ equity of $3,904 million.

As of the end of the fiscal second quarter, consolidated inventories declined 5% while average selling store inventory rose 3% compared with the fiscal 2019 period. Packaway levels were at 30% compared with 43% at the end of second-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 drove lower packaway levels.


In second-quarter fiscal 2021, the company bought back 1.4 million shares for $176 million. The company is on track to repurchase shares worth of $650 million in fiscal 2021.

Outlook

Management stated there remains greater uncertainty regarding the sustainability of the external factors aiding its results and the risk of COVID-related headwinds due to spread of variants and further supply-chain congestion. The company’s guidance reflects comparisons from the respective fiscal 2019 periods.

The company expects earnings per share of 61-69 cents for third-quarter fiscal 2021. Sales are anticipated to grow 9-12%, with comps expected to increase 5-7% compared with the third-quarter fiscal 2019. It expects operating margin to be 7.3-7.9%.


The guidance takes into account expectations of a significant rise in freight costs and distribution expenses. The company also anticipates COVID-related costs to affect EBIT margins by nearly 45 bps. Net interest expense is estimated at $19 million, while tax rate is expected to be 24-25%.

Backed by the robust first-half performance and a favorable third-quarter view, the company updated its guidance for fiscal 2021. It now expects earnings per share of $4.20-$4.38 per share versus $3.93-$4.20 mentioned earlier. Comps are likely to increase 10-11%, suggesting an increase from the earlier stated view of 7-9% growth.

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