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Rapid Growth Continues at Ross Stores, Inc.

By Adam Levine-Weinberg - May 25, 2018 at 8:41AM

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The retailer maintained its trajectory of strong long-term sales and earnings growth last quarter. Nevertheless, the stock pulled back in after-hours trading on Thursday -- creating a nice buying opportunity.

Earlier this week, off-price giant TJX Companies (TJX -0.60%) reported stellar sales and earnings growth for the first quarter. Not surprisingly, its smaller off-price rival Ross Stores (ROST -1.24%) also posted strong sales and earnings when it reported its Q1 results on Thursday afternoon.

Ross Stores stock fell 5% in after-hours trading despite the solid earnings report, as investors were disappointed in the company's guidance. However, like TJX, Ross Stores routinely offers very conservative forecasts. As a result, guidance-related stock pullbacks like this one usually make great buying opportunities.

Another impressive off-price earnings report

On Tuesday, TJX announced that sales surged 11.6% last quarter on a 3% comparable store sales increase. This comfortably outpaced the company's forecast that comp sales would rise 1% to 2%. Furthermore, earnings per share surged 38% to $1.13, up from $0.82 a year earlier and well ahead of expectations. That included a sizable benefit from tax reform as well as strong organic EPS growth.

Ross Stores also achieved a 3% comp sales increase in Q1. Its solid sales performance was particularly impressive because it was facing a tougher year-over-year comparison than TJX. Ross Stores posted a 3% comp sales increase in last year's first quarter, compared to modest 1% comp sales growth at TJX during the same period.

The exterior of a Ross Dress for Less store.

Ross Stores recorded another solid comp sales gain last quarter. Image source: Ross Stores.

Ross Stores' total sales rose 8.5% last quarter, boosted by new store openings. Like many other apparel-focused retailers, Ross Stores said that its results would have been even better but for unfavorable weather trends at the beginning of the spring selling season.

Meanwhile, EPS jumped 35%, from $0.82 to $1.11. Ross Stores' management had projected in early March that EPS would come in between $1.03 and $1.07 for the quarter, while analysts had (on average) expected $1.07.

A downbeat Q2 forecast for Ross Stores

While Ross Stores delivered strong results last quarter despite the significant negative impact of poor weather, management warned that the second quarter could be tougher. As usual, Ross Stores is projecting a 1% to 2% comp sales increase for the upcoming quarter. However, it expects EPS growth to slow considerably, due in part to a $0.02 headwind from the timing of expenses that were shifted from the first quarter to the second quarter.

As a result, Ross Stores' forecast calls for second quarter EPS of $0.95 to $0.99. That would represent a 16% to 21% year over year increase relative to the company's Q2 2017 EPS of $0.82. Analysts were expecting $1.03, on average. On the bright side, Ross Stores boosted its full-year EPS guidance range from $3.86-$4.03 to $3.92-$4.05.

History says ignore the weak guidance

Disappointing guidance is nothing new for Ross Stores investors. However, management has a long-standing habit of underpromising and overdelivering on sales and earnings.

Indeed, for each of its past three fiscal years, Ross Stores has achieved a 4% comp sales increase, despite beginning each year with a forecast for 1% to 2% comp sales growth. Additionally, EPS has routinely exceeded the high end of the company's guidance range by 4% to 6%. Thus, it's not surprising that Ross Stores stock has more than doubled since mid-2014.

ROST Chart

Ross Stores Stock Performance, data by YCharts.

Even excluding the $0.02 benefit from expenses shifting into the second quarter, Ross Stores comfortably beat its sales and EPS guidance last quarter. If weather trends are more favorable during the remainder of the year, the company should be able to post even bigger sales and earnings beats going forward.

Thus, investors shouldn't get too hung up on Ross Stores' guidance, even if it seems to imply a sharp slowdown in earnings growth. The reality will likely be far better than the forecast. That makes any pullback in the stock a potential buying opportunity for long-term investors.

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Stocks Mentioned

Ross Stores, Inc. Stock Quote
Ross Stores, Inc.
ROST
$71.88 (-1.24%) $0.90
The TJX Companies, Inc. Stock Quote
The TJX Companies, Inc.
TJX
$57.13 (-0.60%) $0.34

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