Ross Stores' Optimistic Outlook: Analysts Highlight Growth Potential and Strong Financial Performance

Ross Stores, Inc. ROST shares are trading higher on Friday.

Yesterday, the company reported better-than-expected second-quarter financial results and raised its outlook.

Ross Stores expects third-quarter earnings of between $1.35 and $1.41 per share, versus the $1.38 per share estimate, and earnings of between $1.60 and $1.67 per share for the fourth quarter.

Analysts covering the retail behemoth provided their takes:

• JP Morgan analyst Matthew R. Boss reiterated the Overweight rating on the stock, raising the price forecast to $173 from $168.
• Goldman Sachs analyst Brooke Roach reiterated the Buy rating on the stock, raising the price forecast to $185 from $167 prior.
• BofA Securities analyst Lorraine Hutchinson maintained the Buy rating on the stock, increasing the price forecast to $180 from $170.
• Telsey Advisory Group analyst Dana Telsey reiterated the Market Perform rating, raising the price forecast to $175 from $160.

JP Morgan: According to Boss, the guidance accounts for reduced incentive compensation, freight, and distribution costs, but is impacted by a larger sequential headwind on merchandise margin compared to the 80 basis points headwind in the second quarter, as ROST shifts towards more sharply priced high-quality brands.

Ross Stores is well-positioned in the expanding off-price sector, benefiting from department store share losses and ongoing opportunities for unit growth, the analyst adds.

With a target of 2,500 stores, the company expects to achieve 5-6% annual growth in square footage for over a decade, adding around 90 stores each year with a payback period of less than two years.

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Goldman Sachs: Roach writes that although merchandise margins contracted during the quarter, consistent with Ross Stores’ strategy to elevate branded, value merchandise, improvements in supply chain efficiency and reduced incentive costs more than compensated for this, resulting in significant EBIT margin expansion.

Looking ahead, these incremental distribution and supply chain efficiencies will continue into the second half.

Ross Stores’ increased emphasis on providing branded value merchandise at competitive prices has thrived despite a challenging consumer environment.

The analyst remains optimistic about the expected gains in distribution and supply chain efficiencies that will help mitigate these impacts.

BofA Securities: The analyst increased the EPS estimates for FY24 and FY25 by 3% and 1%, respectively, to $6.09 and $6.54, following the earnings beat and ongoing success with merchandising strategies.

The price target has been raised to $180, reflecting a 28x multiple on FY25 EPS, up from the previous target of $170 and a 26x multiple, due to stronger confidence in sales and profitability prospects, Hutchinson adds.

Telsey Advisory Group: Following a slowdown in the first quarter, comparable sales growth accelerated to 4% in the second quarter.

This rebound was fueled by increased customer traffic and larger basket sizes as shoppers continued to look for value in the current economic environment, the analyst writes.

However, the analyst continues to see uncertainty in the macro environment and remain cautious on the company’s lower income, more price-sensitive consumer.

Price Action: ROST shares are trading higher by 2.10% to $155.72 at last check Friday.

Photo via Shutterstock

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