ROSS Stores (ROST.US) reported higher-than-expected second-quarter results on Thursday, boosted by demand for its discounted merchandise and lower freight costs, and raised its earnings outlook for fiscal 2024.
The company reported second-quarter sales of $5.29 billion, up 7.3% from a year earlier, above the average analyst estimate of $5.25 billion. Earnings per share came in at $1.59, up 20% from a year earlier, above the market's $1.49 estimate. Same-store sales rose 4%. The company's strategy of lowering prices on its brand merchandise and shoes helped boost foot traffic and customer spending per transaction.
Looking ahead, the company expects full-year earnings per share to be between $6.00 and $6.13, above its previous estimate of $5.79 to $5.98. It maintained its outlook for same-store sales growth of 2% to 3% in the fiscal year.
Shares of Ross Stores rose nearly 6% after-hours following the earnings release.
“Ross Stores is benefiting from the returns of the product assortment improvements that provide broader brand and price point options,” said Sky Canaves, chief analyst at Emarketer.
The company's results were in line with those of discount retailer TJX Companies (TJX.US) and large retailers Walmart (WMT.US) and Target (TGT.US), which have shown that consumers across income levels are looking for discounted products.
However, Ross Stores CEO Barbara Rentler said the company is taking a “cautious” approach to its sales outlook because of inflation pressures on low- to middle-income consumers.
“Providing the tremendous value our discount customers expect from us has never been more important, particularly given the ongoing pressure of higher cost of necessities. Therefore, to maximize our market share, we will continue to focus on providing our shoppers with the best value in the market,” Rentler added.
Operating margin expanded 115 basis points to 12.5% in the third quarter, driven by higher brand sales and lower freight and wage costs.
However, higher discounts led to a 80-basis point decrease in gross margin. The company expects further pressure on gross margin in the fiscal year.
“They have seen higher productivity from automation and employee retention and will look to find more ways to save on operating costs to offset the impact of discounts on gross margin,” Canaves said.