What happened
Shares of Ross Stores (ROST 1.17%) took a dive last month after the off-price retailer turned in a disappointing first-quarter earnings report. According to data from S&P Global Market Intelligence, the stock fell 15% in May.
As you can see from the chart below, the stock plunged on May 20 after the earnings report came out, though it recouped some of those losses over the rest of the month.
So what
Like other retailers, Ross Stores was up against difficult comparisons as it lapped a quarter in which Americans received stimulus checks and consumer spending has begun to shift back from goods to services like travel and entertainment.
Image source: Getty Images.
The company, which also owns DD's discounts, said that comparable sales in the first quarter fell 7%, following a 13% increase from Q1 2019 to Q1 2021.
Overall revenue fell 4% to $4.33 billion, missing estimates at $4.53 billion, and earnings per share slipped from $1.34 to $0.97, which also missed expectations at $1.
CEO Barbara Rentler acknowledged that the results were "disappointing," citing inflationary pressures among other factors. The company also slashed its guidance for the full year. It now sees earnings per share of $4.34-$4.58, compared to a previous range of $4.71-$5.12 and $4.87 in 2021. Additionally, it expects a comparable-sales decline of 2%-4% for the year.
Given those numbers, it's not surprising Ross plunged 22.5% on the news, and it was one of several retailers to take a dive that week, including Walmart and Target, as evidence mounted that consumer spending was shifting from goods to services and that retailers had done a poor job of anticipating the change in shopping patterns.
Ross recouped some of those losses over the rest of the month as the S&P 500 moved higher and investors may have thought the stock was oversold.
Now what
Retail stock investors seem to be resetting their expectations after the latest round of results, recognizing that Q1 2021 was a uniquely favorable environment for the sector with stimulus checks, pent-up demand, and consumers still spending money on pandemic-related items, rather than things like travel and going out to eat as they are starting to do now.
Ross has historically been an outperformer in the stock market, and the off-price model still offers a lot to like. Based on its current guidance, the stock looks fairly valued at a price-to-earnings ratio of less than 19.
