Ross Earnings: Solid Sales, Margins Suggest Company Is Benefitting From Consumers’ Value Orientation

Our $103 per share valuation of narrow-moat Ross ROST should not change much after it announced first-quarter results that met our expectations. With the company’s flexibility and value orientation resonating as expected with consumers, we see little reason to change our long-term targets (mid-single-digit top line growth rates against low-double-digit operating margins). With the shares trading near our valuation, we suggest prospective investors seek a larger margin of safety before building a position.

Comparable sales rose 1% against a 10.1% operating margin, near our expectations. Management cited the impacts of continued inflationary pressure on middle-income consumers, unsurprising as shoppers have been compelled to redirect discretionary spending dollars toward paying for increasingly expensive everyday staples. Ross’ operating margin was down around 70 basis points from the same period a year ago, with higher incentive compensation costs and flat sales contributing to the deleverage. Leadership adjusted full-year guidance, now calling for $4.77 to $4.99 in diluted EPS (previously $4.65 to $4.95); our $4.98 estimate is near the top of the new range.

Management indicated it was not satisfied with the results, despite modestly beating its comparable guidance (which called for flat sales), citing a failure to deliver values that were sufficiently compelling. We believe the company will rebound as the retail environment normalizes, with supply chain-related dislocations resulting in full-price store discounting that eroded Ross’s relative value proposition. Still, Ross’ underperformance relative to narrow-moat TJX (whose Marmaxx unit posted 5% comparable growth) was notable, as the chain also lagged in 2022. However, we do not believe that the two companies’ trajectories have meaningfully diverged, attributing Ross’ underperformance to transitory factors. We expect its merchandising and inventory management capabilities will allow it to close the gap.