Ross Stores (ROST) Stock Down on Q4 Earnings & Sales Miss

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Ross Stores, Inc. ROST reported soft results for fourth-quarter fiscal 2020 results, as both top and bottom lines declined year over year and fell short of the respective Zacks Consensus Estimate. Results were affected by soft traffic due to a rise in coronavirus cases as well as elevated costs. Shares of the company declined 4.8% in the after-hours trading session on Mar 2, following fourth-quarter fiscal 2020 results.

Nonetheless, management remains optimistic about being able to sail through the tough times on the back of its solid management team and strong financial base. The company operates in a sector that is likely to encounter lesser brick and mortar competition due to retail closures and bankruptcies. Thus, the company remains well placed to witness market share gains over time and encouraged about its longer-term prospects.

Q4 Highlights

Ross Stores reported earnings of 67 cents per share, down 47.7% from $1.28 per share reported in the prior-year quarter. Moreover, earnings fell quite short of the Zacks Consensus Estimate of $1.03 per share.

Ross Stores, Inc. Price, Consensus and EPS Surprise

Ross Stores, Inc. price-consensus-eps-surprise-chart | Ross Stores, Inc. Quote

Total sales declined 3.7% to $4,249.7 million and missed the Zacks Consensus Estimate of $4,305 million. Though sales surpassed management’s expectations, the surge in COVID-19 cases led to reduced traffic, mainly in California (which is the company’s biggest state). Due to these factors, Ross Stores encountered strict occupancy as well as operating hour limitations.

The company witnessed the largest merchandise gains in the Home category during the holiday season. Meanwhile, the Midwest and Southeast were the best performing geographic regions. However, the company’s largest states, including California, Florida and Texas, significantly underperformed the chain average in the holiday season.

Moreover, the dd’s DISCOUNTS business bore the brunt of pandemic-induced hurdles, though at a lesser extent compared with Ross Stores, due to its smaller count of border and tourist locations.

Notably, comparable store sales (comps) declined 6% in the fourth quarter, following a 3% drop in the preceding quarter. Fourth-quarter comps were affected by the rise in coronavirus cases during the holiday season peak. This, in turn, led to lower traffic, which was somewhat made up by higher average basket size.

Cost of goods sold (COGS) declined 2.1% to nearly $3,157 million. As a percentage of sales, COGS expanded 125 basis points (bps) year over year, driven by higher freight costs of 100 bps (stemming from supply-chain bottlenecks in the industry), elevated buying costs of 50 bps, increased distribution expenses of 15 bps (led by escalated wages somewhat offset by favorable timing of packaway costs) and occupancy deleverages of 30 bps (due to lower sales). These aspects more than offset the 70-bp increase in merchandise margin.

Selling, general and administrative (SG&A) expenses increased 14.7% to $690.6 million and, as a percentage of sales, it expanded 260 bps. This reflected deleveraging effects of lower comps and higher pandemic-related operating costs as well as the timing of incentive costs. Incidentally, the company recorded net COVID-19 expenses of roughly $40 million in the fourth quarter, which had a greater impact on SG&A than COGS.

Operating margin of 9.5% declined from 13.3% in the year-ago quarter due to elevated supply-chain and pandemic-related operating costs, along with the deleverage impact on expenses from reduced sales. These were somewhat made up by a rise in the merchandise margin.

Store Update

Though management remains on track with the store expansion, its pace of openings is likely to moderate this year, particularly in spring. In fiscal 2021, the company expects nearly 60 new locations, including 40 Ross Dress for Less and 20 dd’s DISCOUNTS. Also, it plans to shut down or relocate nearly 10 older stores. Management anticipates opening four Ross Dress for Less and three dd’s DISCOUNTS stores in the first quarter of fiscal 2021.

As of the end of 2020, consolidated inventories declined 18% from the prior year. Packaway levels were at 38% compared to 46% last year. Further, average store inventories were down 16%.

Financials

Ross Stores, which shares space with Burlington Stores BURL, ended the quarter with cash and cash equivalents of $4,819.3 million, long-term debt of $2,448.2 million and total shareholders’ equity of $3,290.6 million. The company had liquidity of more than $5.6 billion at the end of the fiscal fourth quarter, which includes an available cash balance and $800-million available under its revolving credit facility.

Further, management recently approved the reinstatement of its quarterly dividend at 28.5 cents per share, which is payable on Mar 31, 2021, to shareholders of record as of Mar 16. Resumption of dividend payouts reflects the company’s solid cash position and confidence in future prospects.

Outlook

Management’s guidance and results for fiscal 2021 will be posted in comparison with fiscal 2019. Major impacts from the extended closure of the company’s operations in spring 2020, together with the ongoing pandemic-led hurdles, make fiscal 2019 a more appropriate basis for comparison. Given less visibility related to the pandemic and the speed of economic recovery, the company has only offered a specific view for the first quarter, though it provided a general outlook for the entire year.

Comps for the 13 weeks ended May 1, 2021, are likely to decline 1-5%. In the first quarter of fiscal 2021, earnings per share are projected in the range of 74-86 cents. This guidance reflects deleverage impacts from the expected decline in comps, elevated supply-chain costs, ongoing costs related to the pandemic and escalated wages. The Zacks Consensus Estimate for first-quarter earnings is currently pegged at 93 cents per share.

Management expects comps to improve through the year, on the back of continued rollout of the COVID-19 vaccine, likely pent-up consumer demand and prospective increased government stimulus. That being said, earnings are likely to continue bearing impacts from the abovementioned cost-related pressures throughout fiscal 2021. Consequently, profitability in the year is likely to be considerably lower than recent historic highs.

In the past three months, shares of the Zacks Rank #3 (Hold) company have gained 4% against the industry’s decline of 3%.

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