Ross Stores' Low Q4 Bar, Improving Inventory, Potential Trade Down Triggers 7% Price Target Hike By Morgan Stanley

Morgan Stanley analyst Alex Straton reiterated an Overweight rating on the shares of Ross Stores Inc ROST and raised the price target from $119 to $127.
The analyst said that the company's Q3 sales came in 4% ahead of consensus expectations & above the high end of guidance, a more-than-welcome result following two quarters of sequential deterioration to start the year.
Comparable sales accelerated 3 points on a 3 year stack basis & improved sequentially through the quarter as management fine-tuned its merchandise assortment.
Straton added while traffic still fell y/y in Q3, declines were offset by higher AURs & an increase in average basket size.
The company saw particular outperformance in Florida & Texas, specifically in border & tourist locations, while California underperformed as elevated gas prices weighed on spending.
The significant sales outperformance, coupled with better-than-expected gross margin on improved buying & easing freight and in-line SG&A dollars, yielded 3Q EBIT margin & EPS of 9.8% & $1.00, respectively, above estimates.
Ross' updated guidance appears conservative, as it assumes Q4 comps & total sales growth decelerate about 300 basis points & about 100 basis points on an underlying basis, respectively.
While Straton applauds management's conservative approach given the uncertain macro and ongoing consumer pressure, she sees room for another beat in Q4 on improving sales trends, freight normalization, and stronger inventory buys.
She said the pressures that first strained lower-income consumers in 1H are spreading to middle and upper middle-income earners.
As the pressures widen, the analyst expects to see the cohort trade down and look to value-oriented retailers like Ross in 2023.
Price Action: ROST shares are trading higher by 4.03% at $111.93 on the last check Monday.

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