Ross Stores Earnings: The Consumer Quest for Value Drives Robust Off-Price Traffic; Shares Rich

Narrow-moat Ross Store’s high-value branded merchandise and treasure hunt experience continued to lure shoppers scouring for affordability in its third quarter, driving traffic gains with broad-based strength across all income demographics, similar to narrow-moat TJX’s results. Accordingly, sales improved 8%, supported by 5% comparable sales growth that outpaced our 3% assumption. Further, gross margin expanded by 235 basis points to 27.6%, ahead of our 26% estimate thanks to lower ocean freight costs. The benefit contributed to a 135-basis-point improvement in operating margin (to 11.2%), despite higher wage costs. Given the stout results, management nudged its fiscal 2023 EPS guidance to $5.30-$5.36 from $5.15-$5.26, and we anticipate moving our $5.19 estimate within that range. As such, we plan to raise our $107 fair value estimate by a low-single-digit percentage, leaving shares overvalued after a mid-single-digit pop after results