Here Are 3 Factors Shaping Ross Stores' (ROST) Upside Story

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Ross Stores Inc.ROST has been a lucrative investment pick, driven by its off-price business model, better price management, merchandise initiatives, and cost containment and store expansion plans. This has helped the company to witness a positive surprise trend for the past several quarters. Notably, it delivered top and bottom-line beat in the fiscal fourth quarter. This marked the 11th consecutive earnings beat while sales topped estimates in 10 of the last 11 quarters. Additionally, sales and earnings improved year over year.

Earnings benefited from ongoing success in delivering broad assortments of compelling bargains to value-focused customers. Meanwhile, improvement in sales was mainly driven by broad-based strength across major merchandise categories and robust comparable store sales (comps) growth.

Ross Stores, Inc. Price, Consensus and EPS Surprise

Ross Stores, Inc. Price, Consensus and EPS Surprise | Ross Stores, Inc. Quote

Driven by these positive trends, this Zacks Rank #3 (Hold) stock has surged 18.1% in the past three months, outperforming the sector 's growth of 15.8%.

Additionally, the company has a VGM Score of A and an expected long-term earnings growth rate of 10.4%. Our research shows that stocks with a VGM Score of A or B combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer the best investment opportunities.

Let's get a detailed view of factors that are aiding the stock's performance.

Off-Price Model

Ross Stores operates a chain of off-price retail apparel and home accessories stores, which target value-conscious men and women, aged 25-54 in middle to upper-middle-class households. The company's proven business model provides an edge as competitive bargains that it offers continue to make its stores attractive for customers. Moreover, the off-price model offers strong value proposition and micro-merchandising that drive better product allocation and margins.

Backed by these initiatives, merchandise gross margin improved 15 basis points (bps) in the fiscal fourth quarter. Further, solid execution of the off-price strategy should boost top and bottom lines.

Long-Term Store Expansion Plan on Track

Ross Stores has consistently been on track with store expansion plans. This is clear from the opening of 28 stores in February 2019 and so far in March, which includes 22 Ross and six dd's DISCOUNTS stores. This marked the completion of the company's planned store expansion for first-quarter fiscal 2019. Further, this first round of store openings keeps it on track to meet the target of inaugurating 100 stores in fiscal 2019 - including 75 Ross and 25 dd's DISCOUNTS outlets. Its store expansion efforts are focused on continually increasing penetration in the existing as well as new markets.

The company currently operates 1,745 Ross stores and dd's DISCOUNTS stores across 38 states, the District of Columbia and Guam. Over the long term, it 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.

Shareholder Returns Remain Attractive

Ross Stores has a track record of returning value to shareholders from time to time in forms o f dividends and share repurchases. During fiscal 2018, it bought back 12.5 million shares for $1,075 million. Backed by its balance sheet strength and ability to generate cash for funding growth and other capital needs, Ross Stores authorized a new share repurchase program for the next two years and raised the quarterly dividend rate.

Under the new share-repurchase program, the company intends to buy back shares worth nearly $2.55 billion in the next two fiscal years. Additionally, it approved a quarterly cash dividend of 25.5 cents per share, reflecting a 13% increase from the prior dividend rate of 22.5 cents. These shareholder-friendly moves not only underscore Ross Stores' solid financial status but also reflect management's commitment toward enhancing shareholder return.

What Holds the Company Back?

Despite strong surprise trends and positive growth fundamentals, we remain on the sidelines due to expectations of higher freight costs and wage investments in fiscal 2019, which have been hurting margins for a while. These headwinds hurt operating margin and led to higher cost of goods sold and SG&A expenses in fourth-quarter fiscal 2018. This along with expectations of difficult comparisons, a competitive landscape and macroeconomic headwinds led to a soft outlook for the first quarter and fiscal 2019.

The company projects operating margin of 13.4-13.8% in first-quarter fiscal 2019 compared with 15.1% in the prior-year quarter. For fiscal 2019, operating margin is estimated to be 13.2-13.4%, down from 13.6% reported in fiscal 2018.

Furthermore, Ross Stores expects softness witnessed in the ladies apparel business during the holiday season to continue in the first quarter of fiscal 2019. This is likely to impact comps for the quarter, which is estimated to be flat to up 2%. Sales are expected to increase 3-6%. The soft top-line view combined with the aforementioned weakness in operating margin should result in earnings per share of $1.05-$1.11 compared with $1.11 recorded in the prior-year quarter.

For fiscal 2019, the company estimates comps growth of 1-2%, with sales likely to increase 5-6%. This compares with comps growth of 4% in fiscal 2018. This along with operating margin and cost deleverage should result in earnings per share of $4.30-$4.50.

3 Better-Ranked Retail Stocks Worth a Look

Costco Wholesale Corporation COST has long-term earnings per share growth rate of 8.9% and a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank stocks here .

Target Corp. TGT has long-term earnings per share growth rate of 6.3% and a Zacks Rank #2.

Canada Goose Holdings Inc. GOOS has long-term earnings per share growth rate of 31.3% and a Zacks Rank #2.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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