Ross Stores, Inc.ROST reported strong first-quarter fiscal 2017 results, wherein both the top line and the bottom line beat our expectations as well as the company's earnings projection. Moreover, both earnings and sales improved year over year, irrespective of the volatile environment. Results also gained from dd's DISCOUNTS growth in same-store revenue and operating profits.
We note that shares of Ross Stores have substantially outperformed the broader industry in the past one year. The stock gained 14.2%, while the Zacks categorized Retail-Discount & Variety industry grew 3.2%.
Ross Store posted earnings of 82 cents a share that outperformed its guidance of 76-79 cents and the Zacks Consensus Estimate of 79 cents. Earnings were up 12.3% from 73 cents reported in the prior-year period.
Total sales for the quarter rose 7% to $3,306 million and beat the Zacks Consensus Estimate of $3,269 million, driven by 3% increase in comparable-store sales (comps). Comps also surpassed the company's expected rise of 1-2%. This can be attributable to rise in traffic and increased average basket size.
Cost of sales for the quarter remained flat, while merchandise margins went up 15 basis points (bps). Additionally, distribution and occupancy costs declined during the quarter. However, these improvements were marred by a slight increase in freight costs. The quarter also depicted an increase of 20 bps in selling, general and administrative expenses due to higher wages.
Nevertheless, operating margin for the reported quarter contracted 20 bps to 15.2%. However, management asserts that operating margin exceeded their expectations on the back of higher-than-planned sales and stock margins.
The company's expansion plan is on track with the inclusion of five new dd's DISCOUNTS stores and 23 Ross Stores in the fiscal first quarter.
Ross Stores plans to open 28 new stores in the fiscal second quarter, including seven dd's DISCOUNTS and 21 Ross outlets. In fiscal 2017, the company plans to open a total of 90 stores, comprising 70 Ross and 20 dd's DISCOUNTS outlets. However, these numbers exclude its plans to relocate or close 10 existing stores during fiscal 2017.
Ross Stores ended first-quarter fiscal 2017 with cash and cash equivalents of $1,244.2 million, long-term debt of $396.6 million and total shareholders' equity of $2,777.7 million.
During the reported quarter, the company bought back 3.3 million shares for $215 million. Further, it remains on track to repurchase $875 million worth shares through fiscal 2017 under its two-year $1.75 billion share repurchase program approved in Feb 2017. The company paid dividends worth $62 million during the quarter.
Ross Stores, Inc. Price, Consensus and EPS Surprise
In second-quarter fiscal 2017, the company anticipates same-store revenues to increase 1-2%. Earnings per share are projected in the band of 73-76 cents, an increase from 71 cents reported last year. However, the guidance is lower than the current Zacks Consensus Estimate pegged at 77 cents. Sales for the second quarter are anticipated to improve 4-5%.
Operating margin for the second quarter is projected between 13.9% and 14.1% reflecting a decline from 14.4% in the year-ago quarter. The decline in operating margin is attributed to higher wages and freight costs anticipated in the second quarter. Further, net interest expenses are forecasted at $387 million, while the tax rate is projected at 37-38%.
Based on the fiscal first-quarter performance and second-quarter outlook, the company now expects earnings per share for fiscal 2017 in the range of $3.07-$3.17 compared with $2.83 earned in fiscal 2016. This guidance includes about 8 cents benefit from the inclusion of an addition 53rd week in fiscal 2017. The Zacks Consensus Estimate for the current fiscal stands at $3.12.
Zacks Rank and Key Picks
Ross Stores currently carries a Zacks Rank #3 (Hold). Other better-ranked stocks in the retail space include Build-A-Bear Workshop, Inc. BBW , Big 5 Sporting Goods Corp. BGFV and Papa Murphy's Holdings, Inc. FRSH . These three stocks flaunt a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here .
Build-A-Bear has a long-term growth rate of 22.5% and also posted positive earnings surprise of 67.5% in the trailing four quarters.
Big 5 Sporting delivered a positive earnings surprise of 94.5% in the trailing four quarters and has a long-term growth rate of 12%.
Papa Murphy's delivered a positive earnings surprise of 203.9% in the trailing four quarters and has a long-term growth rate of 10.5%.
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