Ross Stores Q1 Earnings Beat Estimates, Sales Improve Y/Y

Ross Stores (ROST) reported Q1 fiscal 2024 earnings of $1.47 per share, surpassing estimates of $1.43, with sales of $4.985 billion, up 3% year-over-year and also above estimates. While Q1 results were strong, driven by demand in cosmetics and geographic growth, the company withdrew its full-year guidance due to macroeconomic uncertainties and potential tariff impacts, particularly given its reliance on Chinese-sourced merchandise; Q2 EPS is projected to be $1.40-$1.55, lower than the prior year's $1.59, reflecting an estimated $0.11-$0.16 per share negative impact from tariffs.

Analysis

Ross Stores (ROST) reported strong first-quarter fiscal 2024 results, with earnings per share of $1.47 surpassing the Zacks Consensus Estimate of $1.43 and total sales of $4.985 billion, representing a 3% year-over-year increase and also beating estimates. This performance, which reached the high end of the company's expectations, was attributed to improving sales momentum throughout the spring, particularly driven by robust demand in cosmetics and widespread geographic growth, with notable strength in the Southeast. Comparable store sales were flat year-over-year, outperforming internal expectations of a 0.6% decrease. The company demonstrated effective cost management, with Cost of Goods Sold (COGS) as a percentage of sales decreasing by 10 basis points to 71.8%, and gross margin expanding by 10 basis points to 28.2%. Operating margin remained flat at 12.2%. Ross Stores maintained a healthy balance sheet with $3.7 billion in cash and cash equivalents and continued its share repurchase program, buying back 2 million shares for $263 million in Q1, with plans for a total of $1.05 billion in buybacks for fiscal 2025. The company also progressed with its expansion, opening 19 new stores in Q1 and maintaining its target of approximately 90 new stores for the fiscal year. Despite these positive Q1 figures and a 12% share price gain over the past three months (outpacing the industry's 1% growth), management has adopted a cautious near-term stance. Citing persistent macroeconomic and geopolitical uncertainties, including prolonged inflation and shifting trade policies, Ross Stores has withdrawn its full-year sales and earnings guidance. A significant concern is the potential impact of tariffs, as over half of its merchandise originates from China. Consequently, Q2 earnings per share are projected to be between $1.40 and $1.55, a decrease from $1.59 in the prior-year period, with this guidance incorporating an estimated $0.11 to $0.16 per share negative impact from tariffs. Q2 comparable store sales are guided to be flat to up 3%.

Key Decisions for Investors

• Investors should weigh Ross Stores' solid Q1 earnings beat and operational execution against the significant uncertainties introduced by the withdrawn full-year guidance and specific concerns regarding tariff impacts on future profitability.
• Closely monitor developments related to U.S.-China trade policies and their quantifiable effects on Ross Stores' COGS and margins in upcoming quarters, particularly given the company's direct sourcing exposure.
• Consider the ongoing share repurchase program and store expansion as potential long-term value drivers, but exercise caution in the near term due to the lowered Q2 EPS outlook and the highlighted macroeconomic and geopolitical risks.