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Ross Stores: Don't Get Carried Away By Growth

Dec. 03, 2018 12:32 PM ETRoss Stores, Inc. (ROST)GPS, BBWI, TJX5 Comments
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  • We summarize ROST's Q3 2018 earnings release and the key takeaways.
  • New store openings and other market share gains are offset by declining margins.
  • Online is the trend, but ROST hasn't logged on.
  • Valuation is already pricing in the positives.

Though Ross Stores' (NASDAQ:ROST) sales have increased 6.6% Y-o-Y while comparable sales growth has come in at 3% (beating consensus estimate of 2.8%), there are a few headwinds to watch out for. Operating margins have declined by 90 basis points Y-o-Y, now down to 12.4% from 13.3% in 3Q2017. The main reason for this decline was the increased COGS thanks to a rise in freight cost and an increase in SG&A expenses due to a rise in wage costs. Ross Stores recently rolled out wage increases across its stores, so margins could continue to remain under pressure.

Additionally, competition in the off-price retail sector is fierce and any attempts by competitors to gain additional market share by lowering prices could hit margins for the entire industry. The lack of an online presence also hurts Ross. Hence, this may not be a good time to buy the stock.

New store openings and other market share gains

Wage increases and departmental store closures are tailwinds for off-price retailers as they are key factors driving market share gains available from those closed stores. Brands are also looking to sell their inventory through alternate channels to make up for those store closures. Ross has benefited from this industry level trend and has managed to open 40 new stores in 3Q2018. In fact, it has now opened 75 Ross stores and 25 Discount DD stores in fiscal 2018. Buoyed by its performance, Ross has upgraded its long-term store target to 3000 from 2500 earlier.

The new store growth and comps growth of 3% has led to sales growth of 6.6% Y-o-Y. Ross has been on a consistent growth trajectory, having completed its 10th consecutive quarter where earnings have beaten estimates.

Q3 2018

Key Metrics (USD, billions)







This article was written by

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A passionately curious analyst.

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