Ross Stores, the second-largest off-price retailer in the U.S., reported a better-than-expected profit in the third quarter but the company remained cautious on outlook as a resurgence in COVID-19 cases hammered sales in November.
The U.S. home fashion chain reported earnings of $0.37 per share versus $1.03 per share seen in the same period last year, also, beating the market expectations of $61 per share. Net income was $131 million, compared to $371 million in the prior-year period. Third-quarter 2020 sales declined 2% to $3.8 billion, with comparable-store sales down 3%, the company said.
“3Q saw meaningful sequential top-line improvement as the quarter progressed, with comps holding in solidly at (MSD%) in the QTD. We also note strong merch margin expansion, driven by favorable buying, supporting our expectation for off-pricers to benefit from improved costing over the near term. While we are impressed with the execution, we continue to prefer TJX and Burlington to play the migration to off-price,” said Janine Stichter, equity analyst at Jefferies.
“We like Ross Stores’ strong, stable business and see oppty for the company to nearly double the store base. While we believe off-price should benefit from an accelerated secular migration due to COVID-19, Ross Stores’ geographic mix, more price-sensitive demo, smaller home exposure, and lack of e-comm exposure make the recovery somewhat less certain than TJX,” Stichter added.
At the time of writing, Ross Stores shares traded 3.33% higher at $113.53 on Friday. However, the stock is down around 4% so far this year.
“We model Q4:20E EPS of $1.09 vs. $1.06 consensus reflecting sales and EBIT declines of (3%) and (10%), respectively. In FY21E, we model EPS of $4.43 vs. consensus of $4.32 and FY19 EPS of $4.60. Our FY21E sales estimate of $16.2B is above FY19 sales of $16B, with EBIT margin of 13.0% below FY19 EBIT margin of 13.4% due to 50bps of higher SG&A costs in the structure,” said John Kernan, equity analyst at Cowen and Company, who gave a price target of $134.
“As we enter the fourth quarter, our month-to-date comparable store sales in November are down mid-single-digits. In addition, there remains a high level of uncertainty related to the worsening health crisis and we are concerned with how the upsurge of this pandemic might impact consumer demand during what we expect to be a highly competitive holiday shopping season,” said Barbara Rentler, Chief Executive Officer.
“Given the lack of visibility we have regarding these external risks and how they may evolve and impact our business, we will continue to manage our operations conservatively and will not be providing sales or earnings per share guidance for the fourth quarter,” Rentler added.
Ross Stores Stock Price Forecast
Fifteen equity analysts forecast the average price in 12 months at $113.71 with a high forecast of $130.00 and a low forecast of $88.00. The average price target represents a 3.19% increase from the last price of $110.20. From those 15 analysts, 12 rated “Buy”, three rated “Hold” and none rated “Sell”, according to Tipranks.
Morgan Stanley gave the base target price of $105 with a high of $137 under a bull-case scenario and $55 under the worst-case scenario. The firm currently has an “Overweight” rating on the off-price retailer’s stock.
“Ross Stores’ -2% y/y 3Q revenue decline defied optimistic expectations and leads peers. Accelerating market share gains and better expense metrics shine. We raise our 2021/22e EPS 10%/7% on a faster revenue and EBIT recovery. Our DCF-derived price target goes to $121 from $111,” said Kimberly Greenberger, equity analyst at Morgan Stanley.
Several other analysts have also upgraded their stock outlook. UBS raised their stock price forecast to $110 from $93; Telsey Advisory Group raised the target price to $130 from $112; Deutsche Bank upped the price target to $123 from $119; Guggenheim increased the target price to $125 from $110; MKM Partners raised the price target to $124 from $105; Citigroup upped stock price forecast to $127 from $108; RBC increased the target price to $130 from $100.
“Market share capture from competitor bankruptcies & store closures, favorable customer fundamentals, and high exposure to Hispanics, the fastest-growing U.S. population segment, support 6-8% long-term revenue growth and 10%+ annual EPS. Upward EPS revisions appear an ongoing positive share price catalyst. Profit flow-through is magnified when comps exceed the 1-2% plan,” said Kimberly Greenberger, equity analyst at Morgan Stanley.
“The ‘everyday value’ proposition fosters comp outperformance, while recessions accelerate customer acquisition. Low average selling prices ($8-10/unit) and narrow gross margin render selling online unprofitable at this price point,” Greenberger added.
Upside and Downside Risks
Upside: 1) Wider retail store closures/bankruptcies fuel comp growth above our forecast. 2) Merchandise margin expansion more than offsets cost inflation. 3) Opening smaller format stores improves opex leverage. – highlighted by Morgan Stanley.
Downside: 1) COVID-19 prompts store traffic pressures, which stymie sales and compress EBIT margin. 2) The branded resale market cannibalizes off-price sales. 3) U.S. economic acceleration spurs consumer trade-up.
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