Ross Stores On The Verge Of Major Rally

Shares of discount retailer Ross Stores (NASDAQ: ROST) were among the best performing US equities this week as shares popped as much as 7% from where they closed last Friday. The catalyst for the pop was a price target increase from the team at Credit Suisse, who upped it from $118 to $125. Even after the rally this week, that’s still suggesting there’s an upside of some 25% to be had. In a note to clients, analyst Michael Binetti noted that recent investor meetings with Ross management "sounded the most optimistic we've heard in years". He was also impressed by the company's increasingly bullish sales and margin outlook for the year ahead.

Binetti feels that the surging inflation readings and the growing cost of living could actually act as a tailwind for Ross stock. The thinking here is that in such an environment, a higher savings rate in low-income families will make Ross Stores the more obvious choice when it comes to purchasing new clothes. This is how things played out in 2020 and for much of 2021 when the economy was reeling from the pandemic. Despite a sharp drop at the onset, Ross stock was still trading above its pre-pandemic levels by this time last year.  Ross’ management has suggested it’s already seeing signs of gaining share from consumers who are trading down to value retail chains. 

The confirmation of this tailwind bodes well for its shares overall. They’ve been under pressure since last summer and indeed were at 52-week lows just a month ago. But it’s looking more and more like a low has been put in and we’re on the verge of a major rally kicking off. 

Solid Earnings

One of the main reasons for this, in addition to macro tailwinds, is the company’s actual financial performance. Last month they released their Q4 earnings which were well ahead of what analysts were expecting on both the topline EPS and bottom-line revenue. The former came in at $1.04, compared to the $0.98 that had been expected, while quarterly revenue at $5.02 billion showed year on year growth of 18%. Looking back to 2019 for a non-pandemic related comparison, comparable store sales were up 9% versus the same period in that year, an impressive statistic to be able to boast of all things considered. 

Morgan Stanley called the Q4 EPS beat “impressive in light of the industry-wide supply chain and COVID-related headwinds” facing the retailer. Analyst Kimberly Greenberger and the team felt those headwinds will fade as 2022 unfolds and sees upside to both Ross's revenue and margin guidance. They also noted that Ross traditionally guides cautiously, a pertinent point considering their CEO Barbara Rentler warned that their comparable store sales for Q1 2022 might be flat if not down.

But Morgan Stanley still felt bullish enough to maintain its Overweight rating after all of this, with a juicy price target of $137. From Tuesday’s closing price, this suggests there’s still room for a 35% rally. Despite the cautious guidance, Ross management felt confident enough in the company’s outlook and prospects to raise its dividend, which is one of the most bullish signals a company can give to investors. 

Getting Involved

For now, these bullish comments and moves all look well justified. Ross shares are approaching their highest levels for 2022 and are easily outperforming the S&P 500 over the past month. They’re up a full 20% since this time in March, versus the 4% the S&P 500 has managed to tack on. For investors thinking about getting involved, $90 is there as a good level of support to have below. To the upside, the $110-130 range makes sense as an initial target, with the stock likely needing blowout earnings next month to justify a move beyond that. For now, at least, it’s all looking good, with the stock’s relative strength index (RSI) powering up towards 70 and the MACD still in a very bullish zone.

There are both fundamental and technical reasons to like Ross Stores stock right now, and we might be looking at the start of a multi-month rally.