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Ross Stores' Growth Strategies on Track Despite Tariff Woes

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Ross Stores Inc. (ROST - Free Report) currently remains a mixed bag as its growth strategies and business model promise continued growth while high costs and tariff-related impacts present near-term headwinds. Notably, the company benefits from the commitment toward merchandising initiatives, off-price model and store expansion.

Driven by these efforts, it delivered the 13th straight earnings beat in second-quarter fiscal 2019, with positive sales surprise in 11 of the last 13 quarters. Moreover, strength across categories, except for ladies, has been aiding its comparable store sales (comps) in the past few quarters. However, the recently announced tariffs on goods sourced from China as well as higher operating costs remain a hindrance to the company’s growth path.

Although shares of this Pleasanton, CA-based company have gained 33.5% year to date, it has underperformed the industry’s growth of 40.3%.

 


Near-Term Hurdles to play Spoilsport

The most prominent hurdle affecting the company’s performance in recent quarters has been softness in the Ladies category. Ross Stores is witnessing soft performance at the ladies apparel category for the past few quarters. The softness in this category is hurting the otherwise strong comparable store sales (comps) performance of the company, which is clear from second-quarter fiscal 2019 results. Though comps improved in the last reported quarter, ladies apparel continued to remain a drag on comps growth.

Additionally, the company anticipates results in the second half of fiscal 2019 to bear impacts of the recent announcement of 10% tariffs on goods imported from China, including apparel and footwear. As a result, Ross Stores cut on its earnings view for fiscal 2019 and provided a soft earnings outlook for the second half. It now expects earnings per share of $4.41-$4.50 in fiscal 2019, down from $4.38-$4.52 stated earlier.

The company also expects earnings per share of 92-96 cents for the fiscal third quarter and $1.20-$1.25 for the fourth quarter, whereas it earned 91 cents and $1.20 in the respective year-ago periods.

Alongside tariff-related headwinds, the company expects occupancy and other expense deleverage to put some pressure on the gross margin in the fiscal third quarter, which are likely to result in soft operating margin. It expects operating margin of 11.8-12% for the third quarter, suggesting a decline from 12.4% recorded in the prior-year quarter.

Efforts to Drive Long-Term Growth

Though the aforementioned near-term hurdles are keeping investors on the sidelines, we approve of the company’s long-term potential as its off-price model provides strong value proposition and micro-merchandising that drive product allocation and margins. This helped the company to witness solid top and bottom-line trends. Further, its merchandise initiatives, focused on investments in workforce, processes and technology, strengthen its buying operation and help source in-trend goods at best prices.

Gains from these traits are also well reflected in the company’s robust comps trend over the past few quarters. Notably, comps improved 3% in second-quarter fiscal 2019, driven by slightly higher traffic and increased average basket size. Comps in the quarter also benefited from strength in the men’s category, and the Midwest and Southeast regions. Moreover, it continues to anticipate comps growth of 1-2% for the third and fourth quarters of fiscal 2019.

Additionally, the company’s strategy of strengthening its store base has made significant contributions to growth over the years. Its store-expansion efforts are focused on continually increasing penetration in the existing as well as new markets. Over the long term, the company expects to operate about 3,000 stores, expanding the Ross chain of stores to 2,400 locations while operating about 600 dd’s DISCOUNTS stores.

Wrapping Up

Though the tough tariff and cost environment is likely to present near-term softness, we are optimistic about the company’s long-term growth potential. Notably, the Zacks Rank #3 (Hold) company’s expected long-term earnings growth rate of 10.5% and a Growth Score of A highlight its growth prospects.

Looking for Better-Ranked Picks? Check These

Burlington Stores, Inc (BURL - Free Report) currently has a long-term earnings growth rate of 15.9% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Dollar General Corporation (DG - Free Report) , also a Zacks Rank #2 stock, has a long-term earnings growth rate of 9.6%.
 
Costco Wholesale Corporation (COST - Free Report) presently has a long-term earnings growth rate of 8.5% and a Zacks Rank #2.

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