Ross Stores Inc. ROST stock has been seeing mixed market sentiments, with a trough witnessed throughout 2018. This is owing to investors' concerns regarding higher freight costs and wage investments that have gravely impacted margins. However, investors' growing optimism about the stock, after a strong holiday season, should bolster the company's fourth quarter and fiscal 2018 results, keeping up with the positive earnings momentum.
Further, the company's commitment to better price management, merchandise initiatives, cost containment and store expansions should cushion the stock in the long term.
A look at the price performance shows that Ross Stores stock surged 5% in the past year, underperforming the industry
's growth of 8%. However, the stock's recent performance reflects an improvement, with shares of this Zacks Rank #3 (Hold) company rising 6.6% in the past month, against the industry's decline of 1.5%. This clearly shows an improvement in investors' sentiments, which should continue throughout 2019, driven by the aforementioned initiatives and an optimistic view.
Let's get a detailed view of factors that are likely to drive the stock higher in 2019.
Ross Stores' off-price business model offering competitive bargains to value-conscious customers makes the company an attractive destination in all economic scenarios. The company's decisions - from merchandising, purchasing and pricing to the location of stores - are made keeping in mind the customer base. Moreover, strong value proposition and micro-merchandising offered by the company should drive product allocation and help sustain the top-line growth trend.
We observe that the company's total sales increased 6.6% in third-quarter fiscal 2018, with comparable store sales (comps) growth of 3%. Historically, sales have increased 8.5% and 8.9% in first and second quarters of fiscal 2018, and 7%, 7.9%, 7.8% and 16% in the first, second, third and fourth quarters of fiscal 2017, respectively. Moreover, comps increased 3% and 5% in the first and second quarters of fiscal 2018, and 3%, 4%, 4% and 5% in the first, second, third and fourth quarters of fiscal 2017, respectively.
Additionally, the company's ongoing success in delivering broad assortments of compelling bargains to value-focused customers has aided bottom-line results over the past several quarters. Consequently, the company has delivered positive earnings surprise in the last 10 quarters.
Furthermore, Ross Stores has consistently been on track with its store expansion plans. This is clear from the opening of 40 stores in third-quarter fiscal 2018, which includes 30 Ross and 10 dd's DISCOUNTS stores. The company expects to end fiscal 2018 with about 1,477 Ross and 235 dd's DISCOUNTS stores, reflecting net increase of 95 locations in the year.
The company's focus on store expansion is further highlighted by its recent research, which suggests that it has the potential to increase penetration in the existing as well as new markets. Consequently, Ross Stores raised the long-term projected store growth target to 3,000 from the prior guidance of 2,500. This will include the opening of nearly 2,400 Ross Dress for Less stores (up from the prior forecast of 2,000) and 600 dd's DISCOUNTS stores (up from the prior assessment of 500).
Moreover, the company's outlook is strong, based on a strong holiday season. Ross Stores expects to deliver robust fourth quarter and fiscal 2018 results. Consequently, it raised the earnings per share view for both fourth quarter and fiscal 2018.
The company now projects earnings per share of $1.09-$1.14 for the fiscal fourth quarter compared with $1.02-$1.07 expected earlier. For fiscal 2018, the company projects earnings per share of $4.15-$4.20, marking an increase from $4.01-$4.10 projected earlier. Comps for the fiscal fourth quarter are estimated to increase 1-2%.
We believe that the aforementioned strategies and actions position Ross Stores for further growth amid margin concerns in 2019. Moreover, a VGM Score of B, with an expected long-term earnings growth rate of 10%, demonstrates the company's growth potential.
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