A year ago, sales cratered at Ross Stores (NASDAQ:ROST). As a non-essential business, the No. 2 off-price retailer had to close its stores for much of the spring, a result of stay-at-home orders. Ross Stores didn’t have an e-commerce business to fall back upon, either.
However, consumers are now venturing out to stores in greater numbers. That’s unleashing massive pent-up demand, causing Ross Stores’ sales and earnings to surge well past 2019 levels last quarter.
An incredible sales recovery
In the first quarter of fiscal 2020, Ross Stores’ sales plunged more than 50%. The company temporarily closed all of its stores on March 20, 2020, and didn’t start reopening them until mid-May. That meant it generated zero revenue for nearly half of the quarter, leading to the steep revenue decline and a substantial loss.
Last quarter, Ross regained all the ground it lost a year earlier and then some. Sales surged 145% year over year, reaching $4.5 billion. That exceeded the retailer’s Q1 2019 sales by 19%, driven primarily by a 13% comparable store sales increase over that period.
Ross Stores’ Q1 sales beat the analyst consensus by more than $600 million. The company also cruised past its own guidance, which called for comparable sales to decline modestly relative to Q1 2019. Lastly, sales trends accelerated dramatically compared to the fourth quarter, when comp sales fell 6% year over year.
Double-digit earnings growth
The stellar sales performance drove equally strong bottom-line results for Ross Stores. Gross margin rose to 29.2% from 28.8% in the first quarter of 2019, partially offsetting higher operating expenses resulting from coronavirus safety protocols and an increase in interest expense due to higher debt levels.
As a result, earnings per share reached $1.34, up 17% from $1.15 two years earlier. That beat management’s initial guidance and the analyst consensus by more than 50%.
Don’t worry about cautious guidance
Ross Stores’ second-quarter outlook calls for comp sales to increase 5% to 7% from Q2 2019. The company expects EPS to fall to between $0.80 and $0.89, down from $1.14 two years ago. Similarly, its full-year forecast calls for comp sales growth to moderate relative to last quarter and EPS to land between $3.93 and $4.20, down from $4.60 in fiscal 2019.
In explaining this guidance, management noted that sales growth could slow as federal stimulus programs wind down. Moreover, the company expects to face ongoing cost headwinds from coronavirus-related expenses, wage increases, and rising freight costs for the rest of this year.
Nevertheless, management appears to be taking a characteristically conservative approach to forming its guidance for the rest of fiscal 2021. If anything, the pandemic continued to depress store traffic during Q1 — especially early in the period. Ross Stores executives acknowledged that consumers are increasingly returning to stores and that sales trends improved as the quarter progressed.
With U.S. consumers sitting on trillions of dollars of excess savings, the tailwinds from pent-up demand and greater acceptance of in-store shopping should more than offset any headwinds from stimulus programs ending. As a result, Ross Stores’ comp sales growth is more likely to accelerate than to slow down in the near term.
Faster-than-planned sales growth would bolster the company’s operating margin. That gives Ross Stores a good chance to beat its 2019 EPS performance this year. While Ross Stores stock has surpassed its pre-pandemic high, the company’s rapid sales and earnings recovery means that there’s plenty of upside left for long-term investors.
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