Ross Stores Moves Higher On Greatly Improved Long Term Outlook

The Ross Stores Outlook Just Got 20% Brighter 

Shares of Ross Stores (NASDAQ: ROST) are moving up because of a combination of factors that include performance, capital returns, and a greatly improved outlook for long-term growth. The company says that, due to changes within the industry, they are now forecasting as much as 20% more growth over the long term than they were previously. Not only are customer trends pointing in their direction but bankruptcies and closures in the wake of the pandemic have left a void Ross Stores wants to fill. The takeaway is that price action is bottoming on the news and it looks like a reversal may already be in play. 

Ross Stores Moves Up On Weak Guidance 

Ross Stores had a good Q4 and provided positive guidance but it was far short of the consensus. The good news is that the long-term outlook is improved enough to offset the near-term weakness and there are capital returns to help bolster sentiment. Regardless, the $5.02 billion in net revenue is up 18.1% versus last year and beat the consensus by 150 basis points. The revenue is up 9% on a 2-year comp-store basis which we view as very positive. 

Moving down to the earnings, the company’s margins contracted considerably from the 2019 period but the outlook is favorable for improvement. The operating margin contracted by 350 basis points but not enough to fully offset the revenue strength and growth. On the bottom line, the $1.04 in GAAP earnings is up from $0.67 last year and beat by $0.06. 

Turning to the guidance, the company is guiding for growth this year but it will be hard to come by. The comps versus last year are starting to get tougher and, when combined with supply chain hurdles, will lead to negative growth in the 1st quarter and possibly in the second. The company is guiding for -2% to -4% growth in Q1 with back-half improvement leading to 0-3% growth for the year. Based on the new outlook for store count and the expectation for headwinds to diminish, we think the guidance is cautious. 

Ross Stores Increases Its Capital Returns 

Ross Stores is a solid dividend payer and share repurchaser that just increased both. The company raised its dividend by 8% for a yield of 1.25% and the payout looks incredibly safe. The distribution is only 25% of earnings and the balance sheet is rock solid. Ross Stores has some debt but almost enough cash, more than $5 billion, to offset it. The leverage ratio is in the range of 1X FCF as well, and coverage is very high, so there are no red flags on the balance sheet. As for the buyback, the company added $1.65 billion to the existing allotment bringing it up to $1.9 billion, an amount to be spent within the next two years. That’s worth about 5.8% of the market cap and the institutions are buying too. Institutional holdings increased by a net 3% of the market cap during Q4 2021 and the first 7 weeks of 2022. 

The Technical Outlook: Ross Stores Hits Bottom 

Price action in Ross Stores hit bottom the week before earnings were released and that bottom was confirmed in their wake. The price action is now moving higher on high volume and above the 30-day EMA. A look at the weekly chart will show a stock sitting on a key support level with indicators pointing to overextension at and rebound from these levels. Assuming the market follows through on this move, we see the stock gaining at least 22% to challenge the 150-day moving average and then possibly breaking above that and moving up to the post-COVID highs.