Ross growth cools amid off-price slowdown

Dive Brief:

  • Ross Stores, which runs Ross and dd's Discounts chains, on Thursday reported that Q1 sales rose 7% to $3.3 billion, and that same-store sales in the period rose 3%. After opening 88 net stores in the past 12 months, the company had 1,561 stores open at end of the period, according to a company press release.

  • Earnings in the quarter amounted to 82 cents per share, up from 73 cents per share in the year-ago period. Net earnings grew to $321 million, compared to $291 in the year-ago quarter. Both measures beat or met most expectations: FactSet analysts cited by MarketWatch had forecast earnings of 80 cents per share on sales of $3.27 billion. 

  • For the second quarter, the off-price retailer is forecasting same-store sales to rise between 1% and 2%, and earnings to land between 73 cents and 76 cents per share, up from 71 cents per share in the prior-year period. For the full fiscal year, which has 53 weeks, the company expects earnings to range between $3.07 and $3.17 per share, up from $2.83 last year.

Dive Insight:

CEO Barbara Rentler called Ross’s first quarter sales and earnings “respectable,” especially in light of uncertainty in retail. The company’s operating margin of 15.2% exceeded its expectations, thanks to above-plan sales and merchandise margin, she noted.

That subdued characterization helped the retailer, in the sense that Ross has worked to tamp down expectations, making them easier to meet or beat. “Ross' tendency to err on the side of caution when issuing future forecasts has paid dividends,” noted GlobalData Retail analyst Håkon Helgesen. “The low-ball sales estimate it released at the end of last quarter has been comfortably beaten.” 

Still, while the report was “far from terrible,” Ross’s first quarter, like rival TJX Cos., does represent a slow-down that hasn’t been characteristic of the off-price apparel sector, even in the current tough environment.

“As with TJX, our data show that Ross suffered from more customer sharing during the first quarter as excessive discounting in the market persuaded some shoppers to spend more elsewhere,” Helgesen said in a note emailed to Retail Dive. “Fortunately, there was little erosion in customer numbers, which suggests that Ross has not fallen out of favor with consumers — it just has to work a bit harder in getting the shoppers it does have to spend more.”

Despite the chatter these days that the U.S. landscape is over-run with retail stores, physical locations remain important when it comes to off-price, he also said. In fact, stores may become even more important to off-price retail companies if their same-store sales continue to slow down. Certainly Ross’s own Q2 guidance suggests that’s likely, he noted.

“Looking ahead, Ross will continue to open stores, adding about 80 to 90 each year across both … banners. Although there is some background noise in the industry which talks down the importance of physical shops, we believe that these remain a vital route to growth for off-price players, and [we] see no reason why Ross should slow the pace of development. Arguably new stores will become even more important for driving the business if comparable sales growth continues to moderate.”

Analysts don’t expect the sluggishness to persist for the off-price retailer, in part because non-apparel categories like home goods continue to perform well and because Ross continues its merchandising improvements in women’s apparel. “We remain positive on [Ross Stores] … as we continue to see improvement in the store experience and a larger assortment of highly recognizable brand names,” retail analysts at Jane Hali and Associates said in a note emailed to Retail Dive. “The home goods section and kidswear is gaining in square footage. Off-price retailers who carry brand names at a bargain prices have been able to attract the very important millennial audience.”

Over the medium term, GlobalData Retail analysts are also optimistic about Ross' comparable sales, Helgesen said. But he added: “Ross will nonetheless need to work much harder to make headway in the year ahead."

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