Ross Stores (NASDAQ:ROST) Q2: Beats On Revenue and Guides Ahead, Stock Soars

Kayode Omotosho /
2023/08/17 4:09 pm EDT

Off-price retail company Ross Stores (NASDAQ:ROST) reported results ahead of analysts' expectations in Q2 FY2023, with revenue up 7.68% year on year to $4.93 billion. Ross Stores made a GAAP profit of $446.3 million, improving from its profit of $384.5 million in the same quarter last year.

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Ross Stores (ROST) Q2 FY2023 Highlights:

  • Revenue: $4.93 billion vs analyst estimates of $4.75 billion (3.92% beat)
  • EPS: $1.32 vs analyst estimates of $1.16 (13.5% beat)
  • EPS (non-GAAP) Guidance for Q3 2023 is $1.19 at the midpoint, above analyst estimates of $1.16
  • Free Cash Flow of $506.9 million, up 124% from the same quarter last year
  • Gross Margin (GAAP): 27.7%, up from 25.8% in the same quarter last year
  • Same-Store Sales were up 5% year on year (large beat vs. expectations of up 0.9% year on year)
  • Store Locations: 2,061 at quarter end, increasing by 81 over the last 12 months

Looking ahead, CEO Barbara Rentler commented, “Despite the recent moderation in inflation, our low-to-moderate income customer continues to face persistently higher costs on necessities. As such, we believe it is prudent to continue to plan the business cautiously. However, given our improved second quarter performance, we are raising our second half sales and earnings outlook. We are now planning comparable store sales for the third and fourth quarters of 2023 to be up 2% to 3% and up 1% to 2%, respectively. Based on these assumptions, same store sales for the 52 weeks ending January 27, 2024 are forecast to be in the range of up 2% to 3%.”

Selling excess inventory or overstocked items from other retailers, Ross Stores (NASDAQ:ROST) is an off-price concept that sells apparel and other goods at prices much lower than department stores.

Off-price retailers, which sell name-brand goods at major discounts because of their unique purchasing and procurement strategies, understand that everyone loves a good deal. Specifically, these companies buy excess inventory and overstocks from manufacturers and other retailers so they can turn around and offer these products at super competitive prices. Despite the unique draw lure of discounts, these off-price retailers must also contend with the secular headwinds of online penetration and stalling retail foot traffic in places like suburban shopping centers.

Sales Growth

Ross Stores is one of the larger companies in the consumer retail industry and benefits from economies of scale, enabling it to gain more leverage on fixed costs and offer consumers lower prices.

As you can see below, the company's annualized revenue growth rate of 5.62% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was mediocre as it opened new stores and grew sales at existing, established stores.

Ross Stores Total Revenue

This quarter, Ross Stores reported solid year-on-year revenue growth of 7.68% and its revenue of $4.93 billion outperformed analysts' estimates by 3.92%. Looking ahead, the analysts covering the company expect sales to grow 4.87% over the next 12 months.

While most things went back to how they were before the pandemic, a few consumer habits fundamentally changed. One founder-led company is benefiting massively from this shift and is set to beat the market for years to come. The business has grown astonishingly fast, with 40%+ free cash flow margins, and its fundamentals are undoubtedly best-in-class. Still, its total addressable market is so big that the company has room to grow many times in size. You can find it on our platform for free.

Number of Stores

When a retailer like Ross Stores is opening new stores, it usually means that demand is greater than supply, and in turn, it's investing for growth. Ross Stores's store count increased by 81 locations, or 4.09%, over the last 12 months to 2,061 total retail locations in the most recently reported quarter.

Ross Stores Operating Retail Locations

Over the last two years, the company has generally opened new stores and averaged 4.18% annual growth in its physical footprint, which is decent and on par with the broader sector. With an expanding store base and demand, revenue growth can come from multiple vectors: sales from new stores, sales from e-commerce, or increased foot traffic and higher sales per customer at existing stores.

Same-Store Sales

A company's same-store sales growth shows the year-on-year change in sales for its brick-and-mortar stores that have been open for at least a year, give or take, and e-commerce platform. This is a key performance indicator for retailers because it measures organic growth and demand.

Ross Stores's demand within its existing stores has been relatively stable over the last eight quarters but fallen behind the broader consumer retail sector. On average, the company's same-store sales have grown by 2.38% year on year. With positive same-store sales growth amid an increasing physical footprint of stores, Ross Stores is reaching more customers and growing sales.

Ross Stores Year On Year Same Store Sales Growth

In the latest quarter, Ross Stores's same-store sales rose 5% year on year. This growth was a well-appreciated turnaround from the 7% year-on-year decline it had posted 12 months ago, showing that the business is regaining momentum.

Key Takeaways from Ross Stores's Q2 Results

With a market capitalization of $39.3 billion, a $4.58 billion cash balance, and positive free cash flow over the last 12 months, we're confident that Ross Stores has the resources needed to pursue a high-growth business strategy.

It was good to see Ross Stores beat analysts' same-store sales, revenue, and EPS expectations this quarter. Management added "...given our improved second quarter performance, we are raising our second half sales and earnings outlook. We are now planning comparable store sales for the third and fourth quarters of 2023 to be up 2% to 3% and up 1% to 2%, respectively." As such, EPS guidance for next quarter and the full year were also both ahead of expectations. Overall, this was a solid quarter for Ross Stores. The stock is up 4.76% after reporting and currently trades at $118.3 per share.

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The author has no position in any of the stocks mentioned in this report.