As Expected, Wall Street Excited About Ross Stores

• Shares of Ross Stores, Inc. ROST have appreciated 6.98 percent year to date, although they are currently trading below their 52 week high.
• The company has reported its Q3 EPS ahead of the consensus, guidance and analysts’ estimates, with in-lien SG&A, while reiterating the 4Q guidance, despite the 3Q beat.

4Q Guidance Conservative

Analyst Pamela Quintiliano of SunTrust Robinson Humphrey reiterated a Buy rating on the company, with a price target of $59.

Quintiliano mentioned that the EPS guidance for 4Q was “in line with management’s typically cautious stance and reflects both the heightened competitive landscape and choppy macro environment.”

However, the F15 EPS guidance was raised from $2.40-$2.45 to $2.45- $2.48, following the robust 3Q beat.

Quintiliano believes that Ross Stores has taken advantage of its robust product availability, as reflected in the increase in packaways. The company is expected to benefit in both 4Q and 2016 from these deals, while continuing to be “selective with its purchases.”

“ROST remains a defensive play in a challenging environment and we expect it to outperform given flexible pricing/ buying strategy, strong availability of goods in the marketplace and increased emphasis on gift-giving,” Quintiliano added.

The EPS estimate for FY15 has been raised from $2.48 to $2.49, while the EPS estimates for 4Q15 and FY16 have been maintained.

Best Positioned for Long Term Gains

Analyst Roxanne Meyer of MKM Partners has maintained a Neutral rating on Ross Stores, with a price target of $52.

Meyer explained that the 3Q beat was driven by robust comp and better than anticipated merchandise margin, with the majority of the 3Q EPS beat being driven by better than expected gross margin, partially offset by an increase in SG&A.

Ross Stores’ 3 percent comp for the quarter was a “standout in the sector,” Meyer said, while mentioning that it represented 1 point acceleration on a two-year stack, as compared to 2Q.

Meyer expressed increased confidence in the opportunity for the company to continue with merchandise margin expansion, although there is also likely to be increased pressure due to fix cost deleveraging, “with distribution costs likely to be an increased pressure point.”

According to the MKM Partners report, Ross Stores is well positioned, as the “second largest off-pricer,” for long term gains, although there was limited visibility into any earnings upside.

The EPS estimates for 2015 and 2016 have been raised from $2.48 to $2.49 and from $2.73 to $2.76, respectively.

Positive Packaway Inventory

Analyst Laura Champine of Cantor Fitzgerald maintained a Hold rating on the company, while raising the price target from $52 to $53.

Champine views the 30 percent year on year increase in the packaway inventory in 3Q as positive, since “this is typically high-ticket, fast-turning branded product that carries above-average margin.”

This was the third successive quarter when packaways increased more than 20 percent year on year, while being the largest single increase in four years.

“Availability is likely to remain quite good, in our view, given weakness some department stores are citing,” Champine added.

The FY15 EPS estimate has been raised from $2.42 to $2.47, driven by positive trends in same store sales and packaway inventory.

Deserves Premium Valuation

Analyst David J. Glick of Buckingham Research maintained a Buy rating and price target of $60 on Ross Stores, while mentioning that there could be 30 percent upside to the stock, following the 3Q beat.

“ROST continued its strong top line growth in 3Q, driven by increasing avg. basket size and strong traffic, even in a challenging retail environment,” Glick stated

Glick also said that consumers appear to be continuing to move to the off-price segment, while the trend of gravitating away form department stores seems to be accelerating.

Although Ross Stores is expected to face some SG&A pressure in 2016, the company is expected to “diligently” manage expenses and deliver operating margin expansion of 20 bps.

“We continue to believe ROST deserves a premium P/E to its growth rates given its strong track record of consistently achieving financial targets, substantial store growth, and dividend/buyback policies which have helped drive impressive shareholder returns,” Glick added.