Ross Stores Faces Challenges Amid Weak Guidance Despite Q4 Gains

GuruFocus
03-06

Ross Stores (ROST +1%) saw a modest increase after its Q4 report, which largely met expectations when excluding a gain from selling a packaway facility. Comps reached the high end of guidance, but disappointing Q1 and full-year guidance overshadowed the results. A 10% dividend increase was announced, yet the overall report was underwhelming. New CEO Jim Conroy, who took charge on February 2, faces significant challenges ahead.

  • Q4 comps rose by 3%, hitting the high end of the +2-3% guidance, driven by increased traffic and improved branded assortments. During the holiday season, cosmetics, home, and children segments performed best, while apparel lagged.
  • Guidance for Q1 comps is set at -3% to flat, and for the full year at -1% to +2%. Although ROST was pleased with holiday sales, a downturn in sales trends began in late January and continued into February, attributed to macroeconomic pressures affecting consumer confidence and discretionary spending.
  • ROST remains hopeful that these challenges are temporary and anticipates that the volatile market could offer more opportunities to purchase closeout merchandise, potentially benefiting future quarters.
  • Operating margin in Q4 was 12.4%, flat year-over-year. The sale of a packaway facility added 105 bps to the margin, resulting in an adjusted 11.35%, aligning with guidance of 11.2-11.5%. For Q1, ROST expects an operating margin of 11.4-12.1%, slightly below the 12.2% from the previous year.

The modest stock increase, despite weak guidance, suggests investors anticipated a cautious outlook, similar to recent guidance from Walmart (WMT, Financial) and Target (TGT, Financial). Off-price peer TJX also provided lackluster guidance last week. Additionally, ROST shares had already declined from $153 to $136 in February, likely pricing in much of the negative outlook.

Another off-price competitor, Burlington (BURL, Financial), will report before the market opens tomorrow. Weak guidance is expected, though Burlington's sensitivity to weather may offer a silver lining. Formerly known as Burlington Coat Factory, outerwear remains a significant part of its sales, and February's cold weather could positively impact its guidance.

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