Ross Stores Inc. (ROST - Analyst Report) posted better-than-expected third-quarter fiscal 2014 results, wherein earnings per share rose 16% year over year to 93 cents, above the higher end of the guided range of 83–87 cents. Earnings benefited from better-than-anticipated top-line growth and robust merchandise gross margins. Moreover, earnings surpassed the Zacks Consensus Estimate of 87 cents per share.

Ross Stores, Inc - Earnings Surprise | FindTheBest

Net sales advanced 8% to $2,598.8 million, backed by positive response from value-focused customers toward the company’s extensive collection of competitive brand bargains. Sales were also above the Zacks Consensus Estimate of $2,554 million.

Ross’ comparable-store sales (comps) climbed 4%, above the company’s guidance of 1%–2% increase. Comps growth was driven by a marginal improvement in traffic as well as higher average basket size. During the quarter, the best performing categories were juniors and home, while on a regional basis the Midwest and Texas stole the show.

Operating margin improved 55 bps year over year to 11.8%, marking a stark contrast from management’s projection of a 10–30 bps decline. The improvement primarily resulted from a 40 bps decline in cost of goods sold and a 15 bps decline in selling, general and administrative expenses, both as a percentage of sales.

During the quarter, cost of goods sold benefitted from a rise in merchandise gross margin and lower distribution costs, offset by higher freight and buying expenses. On the other hand, SG&A expenses reflected leverage from comps growth.

Stores Update

During the third quarter, the company reached its target of opening 95 new stores, including nearly 75 Ross and 20 dd’s DISCOUNTS outlets. The company now expects to end fiscal 2014 with a total of 1,210 Ross and 152 dd’s DISCOUNT stores, following a few store closures planned for the fourth quarter. The company expects net store additions for fiscal 2014 to be 86.

Financials

Ross Stores ended the quarter with cash and cash equivalents of $571.6 million, long-term debt of $398.3 million and total shareholders’ equity of $2,187.3 million.

Further, the company bought back 1.9 million shares for about $141 million during the reported quarter. This brings year-to-date share repurchases to 5.9 million for an aggregate price of $418 million. The company remains on track to repurchase shares worth $550 million in fiscal 2014, thus, completing the $1.1 billion program authorized by it in Jan 2013.

Guidance

Following the satisfactory third-quarter results, the company reiterated its forecast for the fourth quarter, while raising its guidance for fiscal 2014.

For the fourth quarter, the company continues to envision comps growth of 1%–2%. Earnings per share are expected in the range of $1.05–$1.09, marking an increase from $1.02 per share earned in the fourth quarter of fiscal 2013.

Assumptions behind the earnings guidance include sales growth of nearly 5%–6%, supported by comps growth. Operating margin is anticipated to decline in the range of 30–50 bps year over year to range between 12.2% and 12.4%. Operating margin guidance is based on expectations of relatively flat merchandise gross margin and slightly deleveraged expenses.

Further, buying and distribution costs, as a percentage of sales, are expected to grow owing to the acquisition of the New York buying office and the ramp-up of a new distribution center in South Carolina. Net interest expense for the fourth quarter is expected to be nearly $2 million while tax rate is expected range between 37% and 38%. Weighted average diluted shares outstanding are estimated to be about 207 million.

Based on the year-to-date performance and the fourth quarter outlook, Ross now expects fiscal 2014 earnings to lie in the $4.28–$4.32 per share range compared with the previous forecast of $4.18–$4.26 per share. The revised forecast represents about 10%–11% growth compared with earnings of $3.88 per share reported in fiscal 2013.

With its strategy of providing customers with attractive bargains and an off-price business model, Ross is confident about utilizing opportunities amid all climates and also about driving top and bottom lines.

Other Stocks to Consider

Ross Stores currently carries a Zacks Rank #3 (Hold). Stocks worth considering in the broader retail industry include L Brands Inc. (LB - Analyst Report), Zumiez Inc. (ZUMZ - Analyst Report) and American Eagle Outfitters Inc. (AEO - Analyst Report), all carrying a Zacks Rank #2 (Buy).

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