Everyone's Jumping On Ross Stores: What's Changed?

MKM Partners' Roxanne Meyer upgraded the rating on

from Neutral to Buy, while raising the price target from $52 to $65. Meyer mentioned that the company has now delivered strong comps for two quarters, with industry tailwinds expected to drive continued upside to the conservative guidance. There also is better visibility into potential for margin upside in 2016. "Management's reiteration of its low double-digit earnings growth algorithm longer-term reminds us not only of its ability to continually manage costs, but also of its key competitive advantages that should drive market share," Meyer stated. The analyst expects Ross Stores to continue its share buybacks, which would drive EPS growth of over 3 percent annually. Apart from 1Q, the 2016 guidance is in-line with the consensus, based on a "more modest comp assumption", which Meyer sees as a bullish signal. "While 1Q faces the toughest comp compare and higher packaway costs, we are impressed by management's ability to fully offset a wage increase beginning 2Q, and see a margin expansion opportunity in 2H as the company anniversaries its second new DC and the impact from packaway in 4Q15," the MKM Partners report said. For 4Q15, Ross Stores reported its EPS above the consensus, estimate and guidance, driven by lower SG&A and tax rate, along with higher sales, partly offset by lower gross margin due to increased packaway costs. The EPS estimates for 2016 has been reduced from $2.76 to $2.73, to reflect the expected packaway costs.