Report
Zain Akbari
EUR 850.00 For Business Accounts Only

Morningstar | Strong Fourth-Quarter but Somewhat Soft Guidance Leaves Our Outlook Intact for Ross; Shares Rich

We do not plan a large change for our $81 per share valuation for narrow-moat Ross after a strong end to fiscal 2018. While management set guidance lower than our fiscal 2019 target, we suspect its estimate is conservative, and so our long-term marks (mid-single-digit top-line growth, low-teens adjusted operating margins on average over the next decade) are intact. We have a favorable view of Ross and the broader off-price sector, but suggest investors await a more attractive entry point.

Ross saw $15.0 billion in fiscal 2018 sales and adjusted diluted EPS of $4.26, capped by a strong 4% comparable store sales mark in the fourth quarter. Results exceeded our expectations, at $14.9 billion, $4.16, and 1%, respectively. Considering Ross' momentum, the strong retail environment, and the off-price channel's continuing strengths despite digital competition, we believe management's fiscal 2019 guidance, calling for $4.30 to $4.50 in adjusted diluted EPS on 1% to 2% same-store sales growth, is likely conservative (our preannouncement marks were $4.58 and 2.8%, respectively).

While results were strong, management cited sluggish performance in ladies' apparel, which lagged due to a suboptimal assortment that leadership expects will take time to overcome (contributing to the modest top line guidance). The robust quarterly performance despite the rare merchandising miscue reinforces our assessment of the importance of the off-price model's flexibility. With Ross' inventory turnover roughly double that of a major department store like Macy's, it takes less risk and can avoid large-scale markdowns. Combined with its flexibility and ability to buy opportunistically, we believe Ross (and its off-price peers) is in a materially better competitive position than its full-price rivals as digital retailers build their apparel presence. The fast-changing inventory also encourages repeat customer visits, contributing to a treasure-hunt experience that is difficult to match online.
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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