Ross Stores Inc. (ROST), one of the major off-price retailers of apparel and home accessories, came up with fourth-quarter fiscal 2013 earnings of $1.02 per share, in line with the Zacks Consensus Estimate but down 4.7% from $1.07 earned in the year-ago quarter. During the quarter, the company benefited from better-than-expected merchandise gross margin, despite a very promotional holiday season that slightly impacted sales.
Behind the Headline Numbers
Net sales declined by a marginal 0.7% year over year to $2,741.0 million compared with $2,760.6 million in the year-ago quarter. Moreover, sales missed the Zacks Consensus Estimate of $2,752.0 million. Comparable store sales increased 2% compared with the prior-year period.
During the quarter, Juniors emerged as the best performing merchandise category. By region, Texas was the most productive.
Gross profit, in dollar terms, increased 2.3% to $748.9 million from the year-ago quarter $766.9, while gross margin contracted 50 basis points (bps) to 27.3%. The year-over-year contraction in gross margin was primarily due to lower sales, offset by an increase in cost of sales, as a percentage of revenue.
Operating margin was 12.7% in the fourth quarter, down 95 basis points from last year. The decline mainly reflected about 65 basis point improvement in operating margin recorded during the additional week in the prior-year fourth quarter. Additionally, the decline resulted from an increase in occupancy, distribution, freight and selling, general and administrative expenses, partially offset by higher merchandise gross margin.
Fiscal 2013 Highlights
For fiscal 2013, the company’s earnings came at $3.88 per share, up 9.9% from the year-ago earnings of $3.53 and a penny ahead of the Zacks Consensus Estimate of $3.87. Net sales for the year rose 5.2% to $10,230.4 million but marginally missed the Zacks Consensus Estimate of $10,239 million.
Other Financial Aspects
Ross Stores exited fiscal 2013 with cash and cash equivalents of $423.2 million compared with $646.8 million at the end of the prior year. As of Feb 1, 2014, the company possessed long-term debt of $150.0 million and shareholders' equity of $2,007.3 million.
During fiscal 2013, Ross Stores generated $1,022.0 million of cash from its operational activities as against $979.6 million in the prior year.
Enhancing Shareholder Value
During fiscal 2013, the company continued to enhance shareholder value by buying back 8.2 million shares for $550 million through the year, which is half of the company’s total share repurchase authorization of $1.1 billion approved in Jan 2013. The company plans to buy back the remaining $550 million under the authorization in fiscal 2014.
Moreover, the company raised its quarterly cash dividend by 18% to 20 cents per share or 80 cents on an annualized basis. The raised dividend is payable on Mar 31, 2014 to shareholders with record as of Mar 10, 2014.
Guidance
Given the uncertainty prevailing in the economy and the retail markets, along with its strong multi-year top and bottom line comparisons, the company came up with a cautious outlook for the upcoming quarter and fiscal 2014.
For the first quarter of fiscal 2014, the company projects earnings in the range of $1.11 – $1.15 per share compared with $1.07 per share reported in the first quarter of fiscal 2013. Comps are expected to grow at the rate of 1%–2% in the first quarter, while total sales are forecasted to increase about 5% to 6% from last year.
Operating margin is anticipated to be in the range of 14.4% to 14.6%, down about 30 to 50 basis points from 14.9% reported in the prior-year quarter. Tax rate for the first quarter is expected to range from 38% – 39%, while shares outstanding is expected to decline to 212 million.
For fiscal 2014, the company projects earnings in the range of $4.05 – $4.21, reflecting a 4% – 9% increase from $3.88 earned in fiscal 2013. Comps for the year are projected to grow about 1% – 2%.
Total sales for the year are anticipated to increase in the 5%–6% range. The company expects costs to increase with merchandise gross margin coming slightly above the fiscal 2013 level. Depreciation and amortization expense, inclusive of stock-based amortization, is expected to be $290 – $300 million, up from $250 million in fiscal 2013.
Operating margin is expected to be 12.9% to 13.1%, while the tax rate is expected to be 38%. Moreover, the company projects shares outstanding of about 210 million.
The company plans to spend $800 million towards capital expenditures in fiscal 2014, higher than $550 million spent in fiscal 2013. Higher spending during the year is expected to be absorbed for the purchase of New York buying office.
With regard to store expansion, the company plans to open 26 net new Ross and 7 net new dd's DISCOUNTS during the first quarter. In fiscal 2014, the company plans to add about 75 new Ross and 20 new dd's DISCOUNTS stores. Store openings planned for the year do not include the planned 10 store closures or relocations.
Other Stocks to Consider
Currently, Ross Stores carries a Zacks Rank #3 (Hold). Better-ranked stocks in the retail space include Christopher & Banks Corporation (CBK), Finish Line Inc. (FINL) and Deckers Outdoor Corp. (DECK). Christopher & Banks has a Zacks Rank #1 (Strong Buy), while Finish Line and Deckers carry a Zacks Rank #2 (Buy).
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