Note:This report contains substantially new material. Subsequent reports will have changeshighlighted.
Reason for Report:1Q13Earnings Update
Prev. Ed.:Apr 11, 2013, 4Q12 & FY12 Earnings Update
Brokers’ Recommendations: Positive: 50.0% (10 firms); Neutral: 50.0% (10); Negative: 0.0% (0) Prev. Ed.: 10; 10; 0
Brokers’ Target Price: $68.33 ( $2.52 from the last edition, 15 firms) Brokers’ Avg. Expected Return: 5.3%
*NOTE: Though dated Jun 28, 2013, the share price and broker material are as of Jun 7, 2013
Note: A flash update was done on May 23, 2013, on 1Q13 Earnings Release
Note: The tables below (Revenues, Margins, and Earnings per Share) contain material from fewer brokers than in the Valuation table and PMES section. The extra figures in the Valuation table and PMES section come from reports that did not have accompanying spreadsheet models.
Portfolio Manager Executive Summary
Ross Stores Inc. (ROST) and its subsidiaries operate two chains ofoff-price retail apparel and home accessories stores in the United States. Ross is the nation's second largest off-price retailer with FY12 revenues of $9.7 billion. These stores offer branded apparel, shoes, and accessories for the entire family, as well as gift items, linens, and other home-related merchandise. The company also provides small furniture and furniture accents, educational toys and games, luggage, gourmet food and cookware, watches, sporting goods, and fine jewelry.
Of the 20firms covering the stock, 10 provided positive ratings,10 neutral ratingsand nonerendered a negative rating on the stock.
The following is a summarized opinion of the firms:
Positive or equivalent (50.0%; 10/20 firms): The firms with a positive outlook believe that ROST is a well-managed company, and has a compelling business model offering strong value proposition and micro-merchandising that is driving better product allocation and margins. Going forward, the firms see strong fundamentals for ROST as it continues to maintain a strong balance sheet, cash position and investment balances.
The bullish firms state that ROST is advantageously positioned in the market, reaping the benefits of the present drive for brands, solid execution and the shift of consumer preference toward value. Further, the firms view ROST as a promising stock for long-term investment, given its solid financials, impressive buyback and dividend program, store expansion plans and numerous growth opportunities at the dd’s concept.
Going forward, focus on the company’s key areas like constant investments in the merchandise organization and cutting down inventories at stores to the optimum level, along with the company’s initiatives to regulate and utilize systems and processes supporting its capability to make available the right assortments at the right store at the right time should bode well for the company.
Overall, the firms like the company’s off-price business model, which continues to gain from secular trends in traffic patterns and product distribution. The firms believe these trends for retailers like ROST should continue for at least a decade, helping the company’s top and bottom line.
Neutral or equivalent (50.0%; 10/20firms):The firmsremain encouraged by Ross’ strong off-price model and expect continued market share gains, going forward. However, some firms believe the company’s shares will show a drastic change in the near term due tosoftness in comps, tough year-over-year comparisons and lack of major benefits reaping from inventory management, offset by reasonable valuation and conservative company guidance.
Though the firms believe that Ross’ off-price model is important for its outstanding performance in all economic scenarios, they see increased risk for the company’s performance in 2013, given the slightly lower income demographic that may be further impacted by higher payroll taxes and gas prices.
Nevertheless, the firms remain impressed by the company strong financials and cash position, which drives the company to enhance shareholder returns.
June 28, 2013
Overview
According to the firms, the following factors should be considered for investing in ROST:
Key Positive Arguments / Key Negative Arguments- Ross Stores’ competitive position and overall operating results could improve, as the implementation of system enhancements and distribution infrastructure begins to deliver benefits.
- Ross Stores has a healthy balance sheet.
- Solid cash flow provides the resources to fund capital investments like new store expansion, infrastructure investments, as well as share repurchase and dividend programs.
- Ross Stores supply chain efficiencies facilitate it to operate with low inventory levels, thereby underpinning the operating margin growth.
- The main long-term risk and challenge to the company’s business model is to consistently find high-quality branded products at closeout prices.
- Ross Stores mainly cater to moderate or low-end consumers, who are more sensitive to economic factors and are already affected by record high energy prices. Thus, a hike in energy prices and/or a downturn in employment levels could affect the company’s performance.
- Ross Stores faces the risk of being identified as a highly seasonal, highly cyclical, and fashion-oriented business.
Based in Pleasanton, Calif., Ross Stores (ROST) operates as an off-price retailer of apparel and home accessories primarily in the United States. The company operates its stores under the Ross and dd’s Discounts (the company’s new off-price concept for lower-income households) names. The stores offer in-season, branded, and designer apparel, footwear, accessories, as well as gift items, linens, and other home-related merchandise. Ross Stores targets its stores to a broad demographic group consisting of value-conscious women and men aged 25–54, in middle- to upper-middle income households. The majority or about 80% of its customers are women. Prices offered at Ross stores are generally 20% to 60% below the regular prices of most department and specialty stores while the dd’s Discounts stores offer a discount of 20% to 70%. As of May 4, 2013, the company operated 1,112 Ross Dress for Less (Ross) stores and 115 dd's DISCOUNTS locations, bringing the total store count to 1,227. More information is available at the ROST website: The company’s fiscal year ends on Jan 31.
June 28, 2013
Long-Term Growth
Management believes that Ross Stores’ total sales and profitability will be enhanced by targeting expansion in its most productive, existing markets, and full implementation of micro-merchandising tools. Consequently, the company indicated that a lower percentage of new stores will open in the southeast and mid-Atlantic over the next few years.
Ross remains committed to new store growth, buying back stock, and paying an attractive dividend, and has the financial strength to continue its shareholder friendly moves.
Growth plans at ROST are ramping up. Over the longer term, the company sees an opportunity to aggrandize its store base to 2,500 between Ross and dd's DISCOUNTS concepts. The company has raised its target for the Ross concept, supporting 2,000 stores, up from its previous target of 1,500 stores. Additionally, the company continues to target reaching 500 stores in dd's DISCOUNTS format. The Ross concept is underpenetrated in the Midwest and Northeast, but is beginning to expand its reach within the regions.
Further, management remains on track to grow square footage by about 6%–7% annually, aiming to maintain its pace of opening about 70 stores per year.
Management strongly believes that these initiatives will enhance stockholder returns while maximizing the company’s long-term prospects for future growth and profitability. To sum up, management remains confident about the company’s off-price model as the competitive bargains it offers continueto make its stores attractive destinations for customers in all economic scenarios.
ROST remains on track to position its business for continued success and growth,through investments in key areas including: merchandise organization, effective inventory management and continuedfocus onamending and applying systems and processes that strengthen the company’s ability to make available the right merchandise to the right store at the right time.
The firms are encouraged by ROST’s ability to run the business with leaner inventory levels and faster inventory turnover. Lower inventory should help support ROST’s strong merchandise margins and ability to continue to capitalize on in-season inventory buying opportunities in the marketplace to ensure a current assortment and better brand content.
Going forward, management believes it will continue to make strategic investments in merchant organization. This enables them to continually expand market coverage in the vendor community while enhancing relationships with a broad network of existing and newer resources.
The company remains on track to achieve its target of average 10% – 15% annual earnings per share growth over the longer term driven by the company’s consistent store growth, same-store sales gains, sustainable operating margins and the benefit to earnings per share from its ongoing stock repurchase program.
June 28, 2013
Target Price/Valuation
Rating DistributionPositive / 50.0%
Neutral / 50.0%
Negative / 0.0%
Avg. Target Price / $68.33
Digest High / $75.00
Digest Low / $58.00
No. of Firms with Target Price/Total / 15/20
Risks to the projected price target include normal fashion and inventory risks, a general slowdown in discretionary consumer spending, heightened execution risk as the company expands through its new merchandising system, branded product availability, pricing, competition, and macroeconomic trends.
Recent Events
On May 23, 2013, Ross Stores reported first-quarter fiscal 2013 earnings of $1.07 per share, surging 15.1% from $0.93 in the year-ago quarter and in line with the Zacks Consensus Estimate.Net sales increased 8% to $2,539.9 million from $2,356.8 million in the prior-year quarter and surpassed the Zacks Consensus Estimate of $2,523.0 million.
On May 9, 2013, Ross Stores reported better-than-expected same-store sales (comps) for the 4 weeks ended May 4, 2013.Comps for April were up 7%, which beat the company’s forecast of a 5%–6% increase. On a year-over-year basis, the metrics remained even with the year-ago period ended Apr 28, 2012.Comps results for the month benefited from the company’s ability to provide low-priced clothing and accessories to consumers. Ross Stores’ total sales for the 4-week period ended May 4, 2013 climbed 12% to $778 million, compared with $697 million for the same time period ended May 5, 2012.Looking forward, Ross Stores has decided to cease reporting monthly comps from the second quarter of 2013.
Revenue
Provided below is a summary of revenue as compiled by Zacks Research Digest:
Revenue ($ M) / 1Q12A / 4Q12A / 1Q13A / 2Q13E / 2012A / 2013E / 2014E / 2015EDigest High / $2,357.0 / $2,761.0 / $2,540.0 / $2,548.0 / $9,721.3 / $10,397.0 / $11,218.0 / $12,080.0
Digest low / $2,356.8 / $2,760.6 / $2,539.9 / $2,481.3 / $9,721.0 / $10,210.7 / $10,777.0 / $12,080.0
Digest Average / $2,356.9 / $2,760.8 / $2,540.0 / $2,510.9 / $9,721.1 / $10,302.3 / $10,979.9 / $12,080.0
Y-o-Y Growth / 13.6% / 15.1% / 7.8% / 7.3% / 12.9% / 6.0% / 6.6% / 10.0%
Sequential Growth / -1.7% / 22.0% / -8.0% / -1.1%
The Zacks Digest average revenue of $2,540.0 million for 1Q13 was up 7.8% from $2,356.9 million in 1Q12 and down 8.0% from $2,760.8 million in 4Q12. This robust increase in net sales was primarily backed by initiatives taken by the company to keep merchandise fresh by reducing store inventories while providing a wide range of fashion brands.
Comparable store sales for the 13-week period ended May 4 increased 3% versus 9% growth registered for the 13 weeks ended Apr 28, 2012. The comps growth in the quarter was driven by an increase in the size of the average basket.
During the quarter, Juniors and Accessories were the best performing categories. By region, the Pacific Northwest, the Southwest and California registered strong growth.
At dd’s DISCOUNT stores,the company continued to deliver solid sales results, benefiting from the ability to make available fresh and exciting products at a rapid pace in its stores while operating on lower inventory levels.
Guidance
Based on solid first-quarter results, the company projects 2Q13 comps to grow in the range of 1% to 2%, compared to a strong 7% growth registered in 2Q12. The company projects net sales for 2Q13 to grow by 6%–7%, driven by a combination of new store growth, and projected upside in comparable store sales.
Further, the company confirmed that starting 2Q13, it will cease reporting same-store sales results on a monthly basis. It will provide same-store sales results for the quarter, which will be included in the regularly scheduled earnings releases and conference calls.
Please refer to the Zacks Research Digest spreadsheet of ROST for specific revenue estimates.
Margins
Provided below is a summary of margins as compiled by Zacks Research Digest:
Margins / 1Q12A / 4Q12A / 1Q13A / 2Q13E / 2012A / 2013E / 2014E / 2015EGross Margin / 28.8% / 27.8% / 29.2% / 28.0% / 27.9% / 28.0% / 28.2% / 28.7%
Operating Margin / 14.4% / 13.7% / 14.9% / 13.0% / 13.1% / 13.2% / 13.5% / 14.3%
Pre-Tax Margin / 14.3% / 13.6% / 14.9% / 13.6% / 13.0% / 13.6% / 14.2% / 14.3%
Net Margin / 8.9% / 8.6% / 9.2% / 8.3% / 8.1% / 8.3% / 8.6% / 8.9%
In 1Q13, the Zacks Digest average cost of goods sold as a percentage of sales contracted40 basis points (bps)y/y to 70.8%.The lower cost of goods sold came from increased merchandise margin as well aslesser freight and distributionexpenses, offset slightly by higher purchase expenses and deleverage on occupancy costs.
The Digest average gross profit increased 9.3% to $741.1 million from $677.8 million in the year-ago quarter, while gross margin improved 40 bps to 29.2%. The year-over-year expansion in gross margin was primarily due to lower cost of goods sold as a percentage of sales.
Selling, general, and administrative (SG&A) expense in 1Q13rose 7.1% y/y to $362.0 million. SG&A, as a percentage of revenues, remained flat at14.3% due to lower store operating expenses.
Operating income for the quarter jumped 11.5% to $379.1 million from the prior-year level of $339.9 million. Operating margin expanded 50 bps to 14.9%, benefiting from higher merchandise gross margin and favorable timing of expenses.
Guidance
For 2Q13, the company forecasts operating margin in the range of 12.8% to 13%, representing a flat to 20 bps upside compared to an extraordinary 110 bps increase in 2Q12. Net interest expense is expected to be approximately $0.5 million, with an effective tax rate of about 38%.
Please refer to the Zacks Research Digest spreadsheet on ROST for more details on margin estimates.
Earnings per Share
Provided below is a summary of EPS as compiled by Zacks Digest:
EPS / 1Q12A / 4Q12A / 1Q13A / 2Q13E / 2012A / 2013E / 2014E / 2015EDigest High / $0.93 / $1.07 / $1.07 / $0.94 / $3.53 / $3.93 / $4.46
Digest Low / $0.93 / $1.07 / $1.07 / $0.92 / $3.53 / $3.82 / $4.20
Digest Average / $0.93 / $1.07 / $1.07 / $0.93 / $3.53 / $3.88 / $4.33
Y-o-Y Growth / 25.7% / 25.9% / 15.1% / 14.8% / 23.4% / 9.8% / 11.7%
Sequential Growth / 9.4% / 48.6% / 0.0% / -13.1%
Note: Blank cells indicate brokers have not provided EPS numbers.
The Zacks Digest average earnings per share in 1Q13 was $1.07, up 15.1% from the prior-year level of $0.93 a share, primarily attributable to the company's ability to deliver compellingbargains totoday's value-focused consumers, who seek quality at an economic price. The company’s efforts to reduce costs as well as store inventories also benefited the results.
Guidance
For 2Q13, Ross Stores expects earnings per share in the range of $0.89–$0.93, depicting an increase of 10%–15% against growth of 27% registered in 2Q12. Diluted shares outstanding is expected to be 217 million in 2Q13.
For fiscal 2013, the company now expects earnings per share of about $3.70–$3.81, versus its initial projection of $3.65–$3.80 and fiscal 2012 earnings of $3.53.
Please refer to the Zacks Research Digest spreadsheet on ROST for more extensive EPS figures.
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ROST profile on StockResearchWiki.com
Research Analyst / Rajani LohiaCopy Editor / Ananya Sarkar
Content Ed. / Sumit Singh
Lead Analyst / Rajani Lohia
QCA / Sumit Singh
No. of brokers reported/Total brokers / 20/20
Reason for Update / Earnings
Zacks Investment Research Page 1