Growing Ross Stores (NASDAQ:ROST) Beats Earnings, Sees Shares Wobble

Under normal circumstances, beating the market consensus on earnings is sufficient to give the share price of the victorious company a nice upward tilt. “Normal circumstances” are not a particularly apt way to describe markets these days, however, as Ross Stores (NASDAQ:ROST) posted an earnings beat, a revenue beat, but due to a couple of gouges in the armor, lost almost 3% of its value in pre-market trading.

A Killer Quarter

By most available indicators, Ross Stores did surprisingly well this quarter. Based on non-generally accepted accounting principles (GAAP), the company brought in an earnings per share (EPS) figure of $1.02, which handily beat the estimated EPS of $0.61 per share.  Reports suggest that the company had taken a one-time charge of $240 million, which was connected to refinancing efforts on senior notes over the course of the quarter.

Revenue likewise turned in a consensus-beater, coming in at $3.75 billion for the quarter against an expected figure of $3.43 billion. There was a losing point for the company, however; same-store sales were down against this time last year, down 3%.  Even here it beat consensus estimates, which were looking for same-store sales to be down around 12.6% against last year's figures.

Beating the Spread in Several Ways

Ross Stores delivered a lot of beats this quarter: beats in earnings, beats in revenue, beats in same-store sales figures, but it also bucked a trend in another and extremely noteworthy way for 2020: it opened more stores.

The company had originally planned, for its 2020 fiscal year, to open 66 new stores in a range of locations. Indeed, with the last week of October, the company opened 30 Ross Dress For Less outlets and nine dd's DISCOUNTS stores, opening the new locations across 17 different states. Most of the new openings were in locations the company already had a presence in, like California, Florida, and Texas. There were some new arrivals as well, as the company opened up a presence in Ohio, which was the newest state in the Midwest for Ross Stores.

In a point that may prove less than welcome, though, the company has issued no forward guidance for either earnings or revenue going into next year. The company's CEO, Barbara Rentler, pointed to several factors to explain the company's growth this year, however, noting that improved merchandise and a return to store hours that were closer to normal helped drive gains. Though the company ultimately lost 3% before the market opened, the company did see gains as much as 2.54% after the market closed yesterday. This suggests that some profit-taking may have settled in.

A Closer Look Under the Hood

Here's where things get particularly interesting for a company that saw its share price up 2.5% percent before slipping to under 3% in the space of around eight hours or so, before recovering to its current price of $112.24 as of this writing. One recently-discovered point notes that, for October, interest in shorting shares of Ross was down 27.2%. Further, our latest research not only currently considers Ross Stores a buy, it's done so for the last six months. While the price target has been trending downward of late, the latest numbers have bolstered expected prices from last month's $106.71 to this month's $112.04. Given that that target is beneath what the company is currently selling at, the chance of price target revision is fairly high in the near-term. With seven separate analysts doing just that earlier today, it's clear that there's still room to grow for Ross.

Indeed, “room to grow” might be the best way to describe Ross Stores in general. Any company that can open 66 new stores in the midst of the coronavirus mess is looking for better times to come; no one puts that kind of investment into expansion unless they're expecting to realize a profit at some point. Any company that's willing to put profits into retiring debt early is also looking to realize profit; a company that felt less than sure of its footing would likely choose to continue paying the minimum to service its debt and plow that cash into some other part of the business.

Things are looking surprisingly upbeat at Ross Stores, and with the sheer weight of its technical figures—the analyst support, the waning short interest, and multiple beats this quarter—behind it, it's starting to look like anyone who wants to back a clothing retail operation should turn their attention right here.