Freight Costs, Higher Wages Likely To Weigh On Ross Stores' Margins

Ross Stores, Inc. ROST shares traded lower despite reporting a third-quarter earnings beat Tuesday.

The discount retailer reported third-quarter earnings of 91 cents per share, beating estimates by a penny. The company also raised FY18 EPS guidance from $3.92-$4.05 to $4.15-$4.20.

Freight, Labor Issues

Cowen analyst John Kernan said freight and labor issues will continue to pressure the company’s margin structure heading into next year.

“The biggest unknown for ROST’s FY19 remains the outlook for freight costs, along with any potential impact from an accelerated tariff situation, in addition to further wage investments, which holds down potential GM expansion and drives up SG&A,” Kernan wrote in a note.

Ross Stores management said on earnings conference call the company will look to offset these pressures.

Kernan maintains an Outperform rating on the company, but lowered his price target from $112 to $110.

More Upside

MKM Partners analyst Roxanne Meyer also expressed concern about wage increases and freight pressure but said it does not alter the long-term fundamental outlook.

“While the model will likely continue to get hit from higher wages, benefits, freight costs, we see upside opportunity should comps remain above plan, with more material upside in periods where comps are particularly robust,” Meyer said.

Meyer expects comps to benefit from consistent traffic gains, increased inventory availability and from industry consolidation. The analyst maintains a Buy rating, but lowered her price target from $98 to $95.

DA Davidson analyst John Morris wasn't as encouraged by the results, leading the analyst to maintain a Neutral rating and lower his price target from $96 to $84.

“[R]esults came in mixed as the company reported positive comps, weakened gross margin, and flat average unit retail (AUR), leaving investors feeling blase,” said Morris.

Price Action

Shares traded around at $81.74 at time of publication Wednesday afternoon.

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