Ross Stores on Thursday said that quarter two sales rose 8% to $3.432 billion, with same-store sales up 4%, flat with the 4% growth last year. Net earnings in the quarter rose to $317 million, up from $282 million in the prior-year period. Earnings in the period rose 15%, up from 71 cents last year to 82 cents per share. The quarter’s growth was broad-based across the U.S. and merchandise categories, with the Midwest and Southeast seeing the strongest sales, and shoes becoming the best performing category at Ross. The company’s "dd’s discounts" also posted strong better-than-expected gains in both sales and operating profits for the quarter, executives told analysts, according to a conference call transcript from Seeking Alpha.
For the first six months of the year, net earnings were $638 million, up from $573 million in the prior year. Sales in the period rose 7% to $6.738 billion, as same-store sales rose 4% compared to the 3% growth in the first half of last year. Earnings rose 14% to $1.64 per share in the first half, compared to the 9% increase last year, according to a company press release.
Q2 operating margin increased 50 basis points to 14.9% from 14.4% last year. Cost of goods sold in the period improved 25 basis points, driven by a better-than-expected 35 basis point increase in merchandise margin, 20 basis points in lower occupancy costs and distribution expenses that were lower by 10 basis points. Those gains were partially offset by a 25 basis point increase in freight costs and 15 basis points of higher buying costs. Selling, general and administrative expenses during the period were lower by 25 basis points.
Ross Stores shook off the signs of slowdown in off-price retail earlier this year to post a rebound in the second quarter. GlobalData Retail Analyst Håkon Helgesen noted that its performance benefited from some solidified market share and, in an effort that runs counter to some perceptions of the retail environment, the addition of a significant 88 stores since last year. "[We believe that Ross has the scope to keep opening around 80-90 locations a year for the next few years at least," Helgesen wrote in an email to Retail Dive.
According to Helgesen, the stores contained even more unrealized potential, which he said could be leveraged with some low-cost improvements and by beefing up its home goods inventory, which is falling behind rivals like TJX Co.
A promotional environment had been sending shoppers to a wider variety of retailers, Helgesen said. That’s improved, but he warned that Ross could again lose customers if the situation returns. That could indeed be a problem: CEO Barbara Rentler told analysts on a conference call that the promotional environment continued to be very aggressive. "And actually we just consider that that is the way to do business now, but that’s going to continue as we go forward through back-to-school and through holiday" she said.
For the 53 weeks of its full fiscal 2017 year, the company expects earnings to rise 12% to 14% to between $3.16 and $3.23 per share, on top of its 13% gain last year, according to the press release. In the second quarter, the company opened 21 new Ross and 7 dd’s Discounts stores. For the 2017 fiscal year, the company plans about 70 new Ross and 20 dd’s Discounts locations, not including plans to close or relocate a handful of stores, executives told analysts in a conference call.
Ross has a tendency to low-ball its expectations, and Helgesen says that, as a result, it’s wise to take their guidance with a grain of salt. Still, he said, bottom line uplifts will likely continue thanks to lower interest expense. "All in all, Ross is in good shape," he said