Off-price retailer Ross Stores (NASDAQ:ROST) has gained impressively after releasing its second-quarter results toward the end of August. The company turned in an impressive performance during the second quarter in spite of weak trends in retail. Ross is one of the few companies that has bucked the retail industry's weak performance.
Its revenue for the quarter rose 7.3% to $2.3 billion from the year-ago period, and marginally topped analysts' expectations of $2.71 billion. Its earnings also surged 16% to $1.14 per share from $0.98 per share last year, and even better than the consensus estimate of $1.08 per share. For the third quarter, Ross expects its revenue to be in the range of $1.05 to $1.09 per share.
This is a noteworthy performance, especially considering the fact that the stock had sunk to its 52-week low in July. But, it has bounced back on the back of its impressive results and improving consumer sentiment in the U.S. But, will Ross' impressive comeback continue, or will the company face challenges due to sluggishness in the retail industry?
More improvements in the cards
Ross is optimistic about its performance going forward. The company is focused on delivering increased profitability, driven by improvements in its gross margin and a reduction in selling, general, and administrative expenses. Its inventory level also declined 5% on a year-over-year basis, reflecting robust sales, merchandising, and strong execution.
Looking ahead, Ross will be expanding its operations by opening more stores. It is already executing on this front, as during the last quarter, it opened 53 new Ross Stores and 14 dd's DISCOUNTS. Going forward, management hopes to achieve its combined target of opening 95 stores by the end of the year, which includes both Ross and dd's DISCOUNTS stores.
In addition, to bring more customers into its stores, it will continue to offer discounts on a wide array of products, combined with a lean inventory level. This is a smart strategy, because a lean inventory level will allow Ross to avoid mark downs on products that can hurt margins. Moreover, keeping a steady flow of fresh inventory will allow it to keep attracting customers.
Ross is the third largest off-price retailer in the U.S, giving it a considerable advantage on low pricing. According to management, "As an off-price retailer, we have the flexibility to buy closer to need and we'll continue to stay very liquid with plenty of open-to-buy to take advantage of the great opportunities we expect to see in the marketplace over the balance of the year." Ross is confident of executing these strategies in the coming months that will help it deliver solid financial results.
To support its growth prospects, Ross is making substantial investments in merchandise, organization, workforce, and operations. It will continue incurring capital expenses in these areas, which will enable Ross to offer bargain deals to shoppers. This will, in turn, increase its store traffic, driving more customers. In addition, the company is also investing in infrastructure, including new distribution centers and offices.
Headwinds to consider
However, there are some headwinds that could weigh on its performance. Ross does not have any international operations, which puts the company behind peers such as TJX (NYSE:TJX), which has expanded its business to Canada and Europe. As a result, Ross is reliant on just one market for its sales.
Another disadvantage for Ross is the lack of online sales. With the changing behavior of shoppers, it will be difficult for the retailer to take on giants such as Wal-Mart (NYSE:WMT), which not only have online buying options, but have mobile apps that make the shopping experience even more flexible for customers.
Moreover, some analysts are skeptical about its expansion plans in a challenging retail environment. According to Michael Exstein, analyst at Credit Suisse, "The increasing popularity of so-called fast fashion, epitomized by inexpensive apparel purveyed by the likes of Forever 21, H&M and Zara will put further pressure on Ross's pricing." But, Ross' impressive execution so far has helped it deliver good results, and its attractive valuation is another reason why the stock looks like a good pick.
Valuation and conclusion
Ross has a trailing P/E of 19, which is at par with the industry average P/E of almost 19. A forward P/E of 15.95 suggests that Ross' bottom line should continue improving. In addition, Ross' cash position is promising. Excluding debt, its cash pile stands at around $400 million, which will allow it to invest aggressively in its operations.
The company has lined up promising plans going forward, and coupled with its cheap valuation and strong fundamentals, it looks like a good pick.
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