Wall Street Remains Largely Bullish On Ross Stores After Q4 Print, 'Conservative' Guidance

Ross Stores, Inc. ROST shares were down more than 6 percent at the close Wednesday after the company delivered a strong fourth-quarter earnings report accompanied with a cautious outlook. Here's a summary of what some Wall Street analysts are saying after the print.

Price Target, Rating Changes

• William Blair's Daniel Hofkin maintains an Outperform rating on Ross Stores' stock.
• The Buckingham Research Group's Eric Tracy maintains a Neutral rating on Ross Stores' stock with a price target lowered from $86 to $82.
• Morgan Stanley's Kimberly Greenberger maintains an Overweight rating on Ross Stores' stock with a price target raised from $89 to $94.
• Susquehanna Financial Group's Bill Dreher maintains a Positive rating on Ross Stores' stock with a price target lowered from $100 to $95.

Morgan Stanley: Excellent Quarter, Conservative Guidance

Ross Stores ended fiscal 2017 with its third consecutive year of at least 4-percent comp gains, Greenberger said in a research report. It shouldn't come as a surprise that the 9-percent, two-year Q4 stack did not accelerate from the third quarter's 11-percent result, but it is still better than the second quarter's 8-percent rise and the first quarter's 5-percent rise, the analyst said.

During Q4, revenue grew 15.9 percent and SG&A levered 45 basis points year-over-year, Greenberger said. Encouragingly, inventory at the end of the quarter rose just 8.5 percent, which suggests management is exercising a good degree of "inventory discipline," she said. 

Ross Stores' ongoing momentum in Q4 is even more impressive when considering the company's minimal weather benefits compared to other retailers, as 25 percent of its sales are made in California, Greenberger said. 

Looking forward to 2018, Ross Stores' EPS outlook of $3.86 to $4.03 is below the $4.15 per share analysts were modeling. The  guidance is likely conservative, and the company has beat its initial full year EPS guidance for 10 years and counting, according to Morgan Stanley.   

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Susquehanna: Weak But Beatable Guidance

Ross Stores continues to report some of the "most impressive" comparable store sales gains within Susquehanna's coverage universe, Dreher said in a note. Investors may not be giving the company sufficient credit for generating strong comparable store sales gains off some of the strongest compares one year ago. 

The off-price retailer is among one of the few companies within the retail sector to drive SG&A leverage, Dreher said. The fundamental indicators of a strong business — including comps, new store growth, merchandise margin and traffic — remain in place, he said. 

Investors were likely expecting Ross Stores' sales outlook for 2018 to be higher than the 1-to-2-percent growth guidance, the analyst said. Nevertheless, the guidance will likely prove to be conservative, and investors are encouraged to take advantage of the stock's weakness, he said. 

William Blair: Guidance Is 'Standard Operating Procedure'

Investors shouldn't be concerned with Ross Stores' 2018 guidance, as it is merely "standard operating procedure" for the company, Hofkin said in a note. Ross initially offers a conservative outlook of 1-to-2-percent comp growth, which is its typical guidance range entering a new year, the analyst said.

Ross Stores' expense guidance reflects rising costs and higher labor wages, including a one-time bonus payment to associates, Hofkin said.

"Interestingly, the company did not quanitfy the impact of the one-time bonus payment, although we expect more clarity on the amount (and timing) of this payment as the year progresses," the analyst said. 

Ross Stores' status as an excellent operator that can sustainably grow its market share and significantly expand its store base remains unchanged, Hofkin said, making the stock a good buy on current weakness. 

Buckingham: Balanced Stock Price

Ross Stores' earnings report confirmed ongoing "solid execution" in light of the notable comp beat, Tracy said in a note.

The retailer needs to show increased penetration in key categories like children, home and beauty, in addition to expanding its vendor base and enhancing product assortment and freshness, the analyst said. 

Ross Stores' incremental investments — especially in higher wages — imply a more balanced risk-reward profile for the stock, Tracy said.

Under a bull case scenario, shares of Ross Stores could gain 15 percent, but under a bear case scenario, the stock could move lower by 17 percent, according to Buckingham. 

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