Earnings preview: Lower costs to drive Ross Stores Q4 results

Off-price retail apparel operator Ross Stores (ROST) is scheduled to release its fourth-quarter earnings on Tuesday after the market closes. The results will be benefited by lower costs and expenses as well as a benefit related to the favorable resolution of a tax matter. The holiday season performance could moderate the top line growth.

The company entered the holiday season with strong momentum and posted a 3% rise in comparable sales in the third quarter. However, the company had believed the retail environment to be fiercely competitive as the retailer is up against its toughest sales comparisons from 2017. The slowing of sales growth could be hurt by a drop in customer traffic.

However, the recent US Census Bureau data showed that despite a 1.2% decline in seasonally adjusted retail sales in December, the clothing and accessories category posted solid sales growth. This bodes well for Ross Stores and TJX Companies (TJX), which posted strong fourth-quarter comparable store sales.

Analysts expect Ross Stores to report earnings of $1.13 per share on revenue of $4.05 billion for the fourth quarter. In comparison, during the previous year quarter, the company posted a profit of $0.98 per share on revenue of $4.07 billion. Majority of the analysts recommended a “strong buy” or “buy” rating while expecting the stock to reach $95.81 per share in the next 52 weeks.

For the third quarter, the company posted a 23% jump in earnings driven by higher sales and the benefit of tax reform. Sales increased by 7% year-over-year and comparable store sales rose by 3%. Operating margin declined from last year as higher merchandise margin was more than offset by increases in freight costs and wage investments.

For the fourth quarter, the company had expected same-store sales growth in the range of 1% to 2% and earnings in the range of $1.09 to $1.14 per share. The earnings guidance included a one-time, non-cash benefit of about $0.07 per share related to the favorable resolution of a tax matter.

The company has depended mainly on its solid endeavors including better price management, merchandise initiatives, cost containment, and store-expansion plans. This could position Ross Stores well for growth in the fourth quarter.

Shares of Ross Stores ended Friday’s regular session up 0.03% at $94.86 on the Nasdaq. The stock has risen over 21% in the past year and over 8% in the past three months.

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