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Ross Stores: Strong 2Q18 results but guidance disappoints

Discount retailer, Ross Stores on Thursday, 23 August reported strong 2Q18 sales and earnings growth. Fiscal 2Q earnings came in at $389.4mn, or $1.04/share (+26.8% YoY), on revenue of $3.74bn (+8.9% YoY), handily beating the FactSet consensus analyst estimate for earnings of $1.01/share and revenue of $3.66bn. In the same period of last year, the company reported earnings of $0.82/share and sales of $3.43bn. Quarterly EPS growth of c. 27% YoY was driven primarily by the impact of a lower tax rate and share repurchases. Same-store sales rose 5% YoY, well above estimates.

We note though that expense increases (including unfavourable timing of packaway-related expenses, higher freight costs, and wage increases), which company management had mentioned a few months ago, put some pressure on profitability and the company’s pre-tax margin contracted by a full percentage point on a YoY basis, although it remained at a robust 13.9%.

Looking ahead, the firm raised its full-year 2018 guidance with earnings now expected to be $4.01-$4.10/share – up from prior guidance of $3.92-$4.05/share. However, the (increased) guidance disappointed Wall Street with the midpoint of the new outlook being slightly below expectations. Analysts had expected full-year EPS of $4.06 on sales of $14.88bn, resulting in the share price coming under some pressure following the results release. CEO Barbara Rentler also indicated that Ross expects earnings of $0.84-$0.88/share in 3Q18 and $1.02-$1.07/share in 4Q18, while FactSet consensus analyst projections on average were expecting $0.88/share and $1.09/share for those two quarters.

The company also increased its guidance on how many stores it ultimately wants to operate, lifting that number to 3,000 from 2,500 previously. That would include c. 2,400 Ross Dress For Less stores (c. 400 more than the prior target) and 600 dd’s Discounts locations (100 more than before). There are currently 1,453 Ross stores and 227 dd’s stores.

After closing at an all-time high of $95.03/share, Ross shares declined to less than $90 in late trading after the report was released. The share price closed Tuesday 0.4% lower vs its Thursday close at $94.61/share.



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