Sunday, June 8, 2014

Ross Stores’ Disappointing Results: Aberration or a New Trend?

If you don’t have any goals, you can never be disappointed. And if you set your goals too high, you might get crushed. Ross Stores (ROST) might want to consider that in the future.

Bloomberg

Shares of Ross Stores have plunged today, after the retailer beat its third quarter guidance, but issued guidance below analyst forecasts. Reuters has the details on Ross Stores results:

For the quarter ended Nov. 2, Ross Stores reported a profit of $171.6 million, or 80 cents a share, up from $159.5 million, or 72 cents a share, in the prior-year period. The company in August said it expected per-share profit of 75 cents to 78 cents, which was below analyst estimates at the time.

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Sales were up 6% to $2.4 billion. Analysts predicted $2.43 billion.

Same-store sales rose 2%, compared with a 6% gain in the prior-year period…

For the current quarter, the discount clothing and home-goods retailer said it expects per-share earnings of 97 cents to $1.01. Analysts polled by Thomson Reuters recently expected $1.09 a share. The company also said it expects same-store sales to be up 1% to 2% in the period, compared with 5% growth last year.

For a stock that had returned 49% this year–or more than 20 percentage points more than the S&P 500 and twice the average apparel store–that was hardly good news. Shares of Ross Stores have fallen 5.8% to $75.58 , while TJX Corp. (TJX) has dropped 1.4% to $63.08 and Gap (GPS) has declined 1.3% to $41.31.

Sterne Agee’s Ike Boruchow and Tom Nikic call the drop a buying opportunity. They write:

ROST’s top-line shortfall in Q3 was likely driven by government shutdown effects on its macro-sensitive, lower income demographic as comps decelerated in the back half of the quarter. Margin trends remain rock solid, as inventory is well controlled and full-price selling is up. Management now expects a slower holiday selling season, and given expectations were high heading into the print, shares could be under near-term pressure. We are buyers of this story on weakness.

Maxim Group’s Rick Snyder sees the weakness continuing and downgrades Ross Stores to Sell from Hold:

After an impressive run of mid-single-digit comp gains since 2008, the company failed to beat its Q3 comp guidance of a 2.0%-3.0% comp gain, recording a 2.0% Q3 comp gain. We view this as more than a one-time event and believe that the law of large numbers may be finally catching up to Ross at the same time consumer demand is falling.

So what time is it–to buy or to sell?

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