Cautious Ross Stores Falls On Weak Guidance

There Is Upside Risk In Ross Stores Guidance

Ross Stores NASDAQ: ROST gave the market nearly everything that it wanted in the Q2 earnings report. Revenue is bouncing back strongly, tailwinds are producing better-than-expected results, and earnings leverage is back in the picture. The only thing there is not to like about the report is the Q3 guidance and we see upside risk in the numbers. The company Is expecting growth but at a reduced rate compared to the second quarter and well below the analyst consensus. While a negative in the near-term, the underlying reason for the guidance is what gives us hope the company will outperform in the second half. Not to mention the fact that just about every other major retailer raised their guidance this earning cycle. 

Ms. Rentler,CEO of Ross Stores, noted “Looking ahead, there remains much uncertainty regarding the sustainability of the positive external factors that benefited our first-half results as well as the potential risks we may face from the spread of COVID variants and worsening industry-wide supply chain congestion. As a result, we are forecasting third-quarter same-store sales to be up 5% to 7% with earnings per share in the range of $0.61 to $0.69. This guidance reflects our expectation for escalating freight and supply chain costs, and ongoing COVID-related operating expenses.”

Ross Stores Revenue Accelerate In The Second Quarter

Ross Stores' $4.80 billion in revenue is notable for many reasons. First, the net is up nearly 80% from last year and 20% over the past two years. Second, while the pace of year-over-year growth slowed from triple digits to only the high double digits sequential growth held steady at 6.2% from the previous quarter. Third, tailwinds within the retail sector including decreased competition and a greatly reduced discounting environment helped drive revenue 670 basis points above the consensus estimate. 

The gain in revenue is driven not only by the rebound and economic activity but also by the addition of new stores. On a cop basis, sales are up 15% and aided by the addition of 64 new locations. 

Moving down the report, the company was able to widen margins on the combination of increased sales and decreased discounts and drive significantly improved earnings versus Q2 of 2019. The $1.39 in GAAP earnings beat the consensus by $0.35 and compared to EPS of only $0.06 in 2019. The company puts the earnings and cash flow to good use by maintaining a fortress balance sheet, repurchasing shares, and paying dividends. The company repurchased just over $175 million shares during the quarter and is on track to purchase upwards of $200 million more shares by the end of the fiscal year.

Ross Stores Dividend Could Be A Good Fit

Ross Stores' dividend isn’t large in regards to the yield at only 0.9% but it is a fairly safe distribution. The company cut the payment during the pandemic in order to preserve capital, other than that the history shows a trend of annual increases that has the company on track to increase again this year. The company reinstated the dividend late last year at the pre-COVID rate, we see the company instituting a double-digit increase during the fourth quarter of the fiscal year.

Technical Outlook: Ross Stores Pulled Back Into A Buying Opportunity

Ross Stores guidance was weak and has shares moving lower in premarket action. Weak as they may be, the guidance is very cautious and contrary to what the rest of the retail sector is indicating. In that light, we view the 3% premarket pullback as a buying opportunity in this stock. Price action Is still well supported in the $120 range which should produce a bounce if it is touched. If not, we see the stock moving higher and setting a new all-time high within a few weeks.