Report
Zain Akbari
EUR 850.00 For Business Accounts Only

Morningstar | Ladies Apparel Remains Sluggish for Ross, but Our Long-Term Outlook Is Unchanged

Our $86 fair value estimate for narrow-moat Ross should not change significantly after it posted first-quarter earnings. As we had expected, lackluster year-end results in ladies apparel lingered into fiscal 2019, but we believe performance should improve as inventory cycles, leaving our long-term forecast intact (mid-single-digit top-line growth and low-teens adjusted operating margins, on average, over the next decade). With the shares trading somewhat above our valuation, we suggest investors await a more attractive entry point.

Ross’ 2% comparable-store sales growth met our first-quarter expectations, as did its 14% operating margin. Management updated guidance, calling for $4.38 to $4.52 in adjusted diluted EPS (versus its earlier $4.30 to $4.50), a range consistent with our $4.49 pre-announcement target.

Performance remained sluggish in the ladies apparel category, continuing the weakness that became manifest in the fourth quarter. Management cited poor execution, with the assortment not delivering Ross’ usual blend of value and quality. We believe the off-price sector is better able to overcome such missteps than conventional sellers, reflecting fast inventory turnover and as such retailers buy stock constantly and opportunistically, rather than the large purchases that their traditional rivals make ahead of seasons. While it will take time for the inventory to clear, we do not believe the misstep will affect Ross’ long-term appeal to customers. We are also encouraged that management indicated that product availability remains strong, which we expect to remain the case long term considering retail’s ongoing upheaval as digital rivals besiege conventional incumbents.

We similarly do not believe potential additional tariffs will materially affect Ross or other off-price retailers. With a flexible sourcing model that features a constant rotation of brands, Ross should be able to source opportunistically to skirt much of the impact.
Underlying
Ross Stores Inc.

Ross Stores and its subsidiaries operate two brands of off-price retail apparel and home fashion stores, which are Ross Dress for Less? (Ross) and dd's DISCOUNTS?. Ross provides name brand and designer apparel, accessories, footwear, and home fashions for the entire family at savings of 20% to 60% off department and specialty store regular prices every day. dd's DISCOUNTS provides name brand apparel, accessories, footwear, and home fashions for the entire family at savings of 20% to 70% off moderate department and discount store regular prices every day. Both of the company's Ross and dd's DISCOUNTS brands target women and men between the ages of 18 and 54.

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
Zain Akbari

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