Morningstar | Outlook Unchanged as Ross Stores Posts Strong Second-Quarter Results and Lifts Store Count Target
With the firm on track to meet our targets, we do not plan a large change to our $74 per share valuation for narrow-moat Ross Stores after it posted second-quarter earnings. While we have a positive view of the off-price channel and Ross' ability to use its inventory management and procurement strengths to generate returns, we contend that current share prices more than adequately account for the retailer's advantages and suggest investors await a more attractive entry point.Ross posted 9% second-quarter revenue growth based on 5% comparable store sales expansion against a 13.8% operating margin. Management revised its fiscal 2018 EPS guidance to $4.01 to $4.10 from its earlier $3.92 to $4.05, with the new range consistent with our $4.08 preannouncement outlook.
Ross cited broad-based gains as the drivers of its performance, with the namesake chain and dd's Discounts contributing to growth. While the results are consistent with strong earnings across much of retail this quarter, our long-term outlook for Ross, calling for mid-single-digit top-line growth against low-teens adjusted operating margins over the next decade, remains in place as we expect competition to limit profitability expansion.
Management announced it was raising its long-term store count ceiling to 3,000 between both banners from its earlier 2,500. We do not disagree; our forecast had already called for Ross to approach the new mark by the end of our explicit forecast. While store closures are more aligned with the retail zeitgeist than footprint expansion, we contend that the treasure-hunt experience that off-price retailers provide should limit encroachment from digital rivals. Still, we are encouraged that the firm does not plan to immediately ramp up its annual store growth from its current roughly 100-unit pace as discipline should help ensure high real estate quality and limit the risk of operational disruption as the new stores will eventually require distribution capacity expansion.
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.
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