Stock Analysis & Ideas

Ross Stores Craters after Earnings Report; What’s Next?

The earnings report out of Ross Stores (ROST) was a disaster. A disaster sufficient, in fact, to send the company down 27.4% in premarket trading today. The stock is still down over 23% on the day.

It’s a bad sign when a store built around bargain hunting can’t draw in bargain hunters. Bad sign enough, in fact, to leave me bearish on the stock as a whole.

The last 12 months for Ross Stores stock have been mostly down. A year ago, the stock was trading around the $120 range, usually within a dollar or two. Over the last 12 months, though, the share price has plunged.

Though a recovery started up in March that may have made shareholders think the good times were coming back, that recovery proved unsustainable.

The latest news isn’t much better. The company’s earnings report proved a miss on all levels. Ross Stores turned in earnings of $0.97 per share against a Zacks estimate calling for $0.99 per share. Revenue also fell short, coming in at 4.72% less than the Zacks estimate called for. The company posted $4.33 billion for the quarter.

Wall Street’s Take

Turning to Wall Street, Ross Stores has a Moderate Buy consensus rating. That’s based on 11 Buys and six Holds assigned in the past three months. The average Ross Stores price target of $102.89 implies 42.77% upside potential.

Analyst price targets range from a low of $78 per share to a high of $135 per share.

Investor Sentiment Trending Slightly Positive

Right now, things don’t look great for Ross Stores, but there are some positive signs. The company will need all the help it can get, as right now, it has a Smart Score of 3 out of 10 on TipRanks, the highest level of “underperform.” That makes it more likely than not to lag the broader market.

Hedge fund involvement, as expressed via the TipRanks 13-F Tracker, is a cause for very little concern. Hedge funds pulled back on Ross Stores in the latest quarter, going from around 18.29 million shares to just over 18.06 million shares.

In fact, in the last two years, the lowest level of hedge fund involvement was just under 14.9 million shares. That shows a surprising constancy from a company whose share price has fluctuated so much in that time.

Insider trading, meanwhile, is somewhat Buy-weighted, especially lately. There have been no transactions registered in April or March. The last trade goes back to February, where Buy transactions led Sell transactions seven to five. As for the last 12 months, it’s a similar story, with Buy transactions again leading Sell transactions, this time by 20 to 12.

Retail investors—at least, those who hold portfolios on TipRanks—are bearish but starting to turn around. TipRanks portfolios with Ross Stores shares in them were up less than 0.1% in the last seven days but were down 1.8% in the last 30 days.

Finally, there’s Ross’ dividend history to consider. It’s behaving just like an income investor would like to see, with not only stable payouts but also regular raises. The company has hiked its dividend by an average of $0.03 per share in the last three years. Not a big hike, but certainly one to help keep up with inflation.

A Bargain Store that Can’t Draw Bargain Hunters

Ross Stores’ CEO, Barbara Rentler, put the company’s position well: “We are disappointed with our lower-than-expected first-quarter results. Following a stronger-than-planned start earlier in the period, sales underperformed over the balance of the quarter.”

Rentler then went on to echo a lot of sentiment, noting that the combination of spiking inflation and shaky geopolitics would contribute to further destabilization, prompting Ross Stores to offer a “conservative outlook.”

That’s kind of the problem here. Ross Stores is built around bargains. This should be prime time for a discount chain to clean up. It’s right there in the name: “Ross Dress for Less.” With customers increasingly watching their pennies in a bid to afford the spike in demand at the gas pump and the grocery store, Ross should be making headway. It’s not.

However, we’ve also seen discount retailers from Walmart (WMT) to Target (TGT) report losses as well. This suggests that the consumer may be pulling in his or her wallet for the long haul. That’s bad news for pretty much the entire retail sector.

Even individual analysts are mixed right now. With Barclays keeping its Buy rating in place but Wells Fargo sticking to Hold, it’s clear that clarity is in short supply right now around Ross Stores.

Said sector depends on active consumers buying goods. If consumers are less active and goods are higher-priced coming into the stores, thanks to supply chain snarls, then that’s the worst of all worlds for retailers.

It’s also a note of bad news coming for the entire field; if even the discount retailers can’t keep customer interest, then what hope does the more standard retailer have?

Concluding Views

The entire retail sector is likely to suffer in the near term. With a recession looking increasingly likely and inflation spiraling out of control, shoppers are likely to keep a tight rein on their spending going forward. That, in turn, means cuts at every retailer that isn’t essential. Clothing is essential, certainly, but only so far.

Ross Stores is already demonstrating some of this. It’s still making sales, but it’s seeing a lot less than it might under better circumstances. With investor sentiment starting to turn and even the CEO offering conservative guidance, Ross Stores isn’t looking like a good bet in the short term. That’s why I’m bearish on this retailer right now.

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