On Friday, Evercore ISI updated its financial outlook for Ross Stores, Inc. (NASDAQ: NASDAQ:ROST), raising the price target to $180 from the previous $170, while retaining an Outperform rating on the stock. The firm's analysis highlighted that despite a revenue shortfall, Ross Stores posted earnings per share (EPS) of $1.48, or $1.45 excluding a $0.03 benefit from packaway inventory, surpassing the guidance range of $1.35 to $1.41 and the consensus estimate of $1.40.
Same-store sales (SSS) growth was reported at 1%, slightly below the expected 2%, which was attributed to weather challenges and a miss in the ladies athleisure category.
The company has projected a rebound in fourth-quarter comparable store sales, forecasting an increase of 2-3%. This outlook is based on improving weather conditions, a trend that has been noted across the retail sector, and a surge in holiday and gift-related categories. Evercore ISI remains conservative with a 2% prediction for fourth-quarter same-store sales but acknowledges the potential for a 3% increase if current trends persist.
Ross Stores demonstrated robust margin performance, with gross margins expanding by 70 basis points year-over-year, compared to flat or slight declines anticipated by analysts. This strong margin performance is seen as conservative, suggesting that the anticipated merchandise margin compression in the fourth quarter may be less severe than expected.
The firm anticipates that the pressures on merchandise margins, which have been a significant impediment to earnings in 2024, will substantially lessen in 2025. This could lead to another year of margin improvement exceeding Ross Stores' long-term targets.
Evercore ISI's stance on Ross Stores remains positive, but they note that for the stock to fully realize its value, the retailer must demonstrate that its enhanced merchandise strategy can narrow the gap in same-store sales growth compared to Marmaxx and reduce the 5-point price-to-earnings (P/E) discount relative to TJX Companies (NYSE:TJX).
In other recent news, Ross Stores, Inc. announced its third-quarter results for 2024, revealing a balance of growth and challenges. The company reported an increase in total sales to $5.1 billion, with comparable store sales rising by 1%. Earnings per share for the quarter increased to $1.48, up from $1.33 the previous year, and net income reached $489 million. Despite these positives, Ross Stores grappled with severe weather and high costs, impacting customer spending.
In a significant development, CEO Barbara Rentler is set to step down, with Jim Conroy taking over as CEO on February 2, 2025. The company's strategy is being fine-tuned, with a focus on refining its brand and merchandise mix. Looking ahead, Ross Stores anticipates a 2-3% increase in comparable store sales for Q4, with earnings per share expected to be between $1.57 and $1.64. However, a decline in total sales of 1-3% is also expected for the same period.
InvestingPro Insights
Ross Stores' financial performance and market position align well with Evercore ISI's optimistic outlook. According to InvestingPro data, the company's revenue growth of 9.81% over the last twelve months and a 7.15% quarterly growth indicate a strong sales trajectory, supporting the analyst's positive view on the company's future performance.
The retailer's robust financial health is further evidenced by its EBITDA growth of 23.11% and an operating income margin of 12.06%. These metrics suggest that Ross Stores is effectively managing its costs and improving profitability, which aligns with the analyst's observations on margin expansion.
InvestingPro Tips highlight that Ross Stores is trading at a low P/E ratio relative to its near-term earnings growth, with a PEG ratio of 0.7. This valuation metric supports Evercore ISI's decision to raise the price target, as it suggests the stock may be undervalued considering its growth prospects.
Additionally, Ross Stores' status as a prominent player in the Specialty Retail industry and its history of maintaining dividend payments for 31 consecutive years underscore its stability and market position. These factors contribute to the overall positive outlook presented in the article.
For investors seeking a more comprehensive analysis, InvestingPro offers 12 additional tips for Ross Stores, providing a deeper understanding of the company's financial health and market position.
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