Ross’s First-Quarter Earnings Disappoint, but Its Long-Term Outlook Is Intact; Shares Attractive

While we were unimpressed by narrow-moat Ross’s first-quarter earnings, we only plan to reduce our $108 per share valuation by a high-single-digit percentage, a more measured response than the shares’ 20% plunge in after-hours trading. Although we had higher hopes for its sales (7% comparable sales decline versus our expected 2% slide) and operating margin (roughly 10.3%, adjusted to exclude a temporary expense timing benefit, versus our 10.5% target), we believe the chain’s advantages are intact and that it should be able to capitalize on its value orientation. Furthermore, we do not see evidence that the firm’s value proposition to customers (treasure-hunt shopping experience featuring steep discounts on branded merchandise) or vendors (discreet sale of excess merchandise with flexible terms) has changed, so our long-term expectations still include mid-single-digit percentage top-line growth and low-double-digit operating margins over the next decade. We believe the current trading reaction is myopic, ignoring Ross’s long-term strengths, suggesting a buying opportunity.