Discount retailer Ross Stores (NASDAQ: ROST) recently gave out surprisingly better-than-expected guidance for the upcoming holiday quarter. It raised its FY2023 earnings outlook on the back of robust Q3 results. The stock has already gained almost 20% since then. Nonetheless, I believe the stock presents a good investment hedge in a high-inflation environment where consumers seek more and more discounted merchandise.
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In the previous two recessionary phases in 2008 and 2001, ROST stock clearly outperformed the underlying benchmark. If history repeats itself, ROST stock will be a clear winner in 2023.
Ross Stores operates the largest off-price retail apparel and home accessories retail stores in the U.S. under the Ross Dress for Less and dd’s DISCOUNTS brands.
Upbeat Q3 Results & Solid Guidance Despite Macrouncertainty
On November 17, Ross Stores posted outstanding third-quarter results that smashed the Street’s expectations. Adjusted EPS of $1.00 handily beat analysts’ consensus estimate of $0.81. This was a sigh of relief after muted Q2 results and a dim outlook provided during its preceding second-quarterly earnings release.
Q3 EPS, however, declined 8% year-over-year due to a 3% decrease in comparable sales, higher markdowns, and increased distribution costs. On the positive side, comparable sales fared better than guided expectations of an 8% decline. Although traffic was low, higher average selling prices and a bigger average basket size somewhat offset the impact.
Q3 sales came in at $4.57 billion versus the consensus estimate of $4.36 billion. Notably, the sales numbers beat the high end of the company’s guidance.
What was more impressive was that despite high inflation curbing consumer spending, the off-price retailer provided better-than-anticipated fourth-quarter and full-year guidance. Wall Street applauded the positive outlook despite predicting higher markdowns in the upcoming holiday season.
Ross management remains confident in its off-price concept as more customers will be on the lookout for value deals at its stores. During the upcoming holiday season fourth quarter, the company forecast comparable sales to be “flat to down 2%” year-over-year with EPS in the range of $1.13 to $1.26, much ahead of the consensus expectations.
For the full year of Fiscal 2022, Ross Stores now expects EPS of $4.21 to $4.34, much higher than the prior guidance range of $3.84 to $4.12.
The company continued to pay its regular quarterly dividends of $0.31 per share. In addition, it remains consistent with its planned share repurchases of $1.9 billion, valid through Fiscal 2023.
ROST Has a Significant Scale Advantage Over Smaller Players
ROST has an impressive competitive advantage over its peers in terms of scale. With 1,669 locations in 40 states, Ross stores offer in-season designer apparel, accessories, footwear, and home fashions. Further, it comes at a discount of 20% to 60% compared to regular department and specialty store prices.
Further, it has a network of 311 dd’s DISCOUNTS stores in 21 states. The deep-discount stores offer an affordable assortment of brand apparel, accessories, footwear, and home fashions. They come at 20% to 70% lower price levels versus moderate department and discount store prices. Markedly, the stores are situated at convenient locations.
On top of that, Ross stores maintain an efficient inventory management system, smoothly managing its inventory across its wide network of stores.
The impeccable store reaches as well as inventory management skills is almost impossible to recreate by any new entrant.
ROST Stock’s Valuation is Reasonable
Notably, ROST stock is trading at a discount to its own five-year historical P/E average. ROST has a forward P/E ratio of 27.3x, reflecting a 25.3% discount from its five-year average of 36.5x.
The discounted valuation potentially presents a great buying opportunity for ROSS, given the strong growth and business fundamentals.
Is ROST Stock a Good Buy, According to Analysts?
The Wall Street community is clearly optimistic about the ROST stock. Overall, the stock commands a Strong Buy consensus rating based on 13 Buys and three Holds. Ross Stores’ average price target of $120.19 implies 3.2% upside potential from current levels.
Closing Thoughts
ROST stock has gained 6% over the past year, significantly beating the major indices. The inflationary environment is turning out to be beneficial for ROST, given that customers are looking for value deals at its stores. The larger basket size reported during the Q3 results clearly proves that point.
As customers continue to fight it out against growing inflation, value-oriented retailers like Ross may report increased market share gains as well as higher profitability in the coming quarters. Plus, its long-term growth thesis remains intact. Hence, I maintain my bullish stance on the stock. I will buy the stock despite its recent post-earnings rally.
