Is it advisable to invest in this well-established retail company, given the current market dip?
Ross Stores (ROST) faced challenges in the first quarter of 2022, missing both analysts' sales and diluted earnings per share (EPS) expectations. The company's comparable-store sales decreased 7% year over year during the quarter.
In Q1 2022, Ross Stores reported EPS of $1.47, slightly up from $1.46 in Q1 2024, with sales reaching $5.0 billion and flat comparable store sales. However, the company withdrew its annual guidance due to macroeconomic uncertainty, particularly tariffs affecting over half its merchandise sourced from China.
Analyst expectations for Ross's earnings had generally forecasted a slight year-over-year decline in EPS, reflecting the challenges Ross faces in revenue growth and profitability amidst inflation and economic pressures. The Q1 2022 sales and EPS shortfall stemmed from multiple headwinds: persistent cost inflation, uncertainty around tariffs and trade policy, and cautious consumer spending as economic growth slows. These factors also pressured operating margins and cash flow.
Despite these pressures, Ross maintains a significant market presence with 1,847 Ross Dress for Less stores and 358 dd's DISCOUNTS stores, offering substantial discounts on apparel, which tends to appeal during inflationary periods. The company is also actively returning capital to shareholders through dividends and share repurchases, indicating strong cash flow generation even in challenging times.
Ross Stores has high-single-digit annual dividend growth potential and a dividend payout ratio for the current fiscal year expected to be 27.9%. The stock's dividend yield is slightly above the S&P 500 index's yield at 1.7%.
The lower sales of Ross Stores have partially neutralized its decrease in weighted-average outstanding share count to 348.8 million during the first quarter, as evidenced by the net margin moving 270 basis points lower year over year to 7.8% in the first quarter.
The sell-off in Ross Stores appears to have brought it back to an enticing valuation for long-term investors. Ross Stores posted $0.97 in diluted EPS for the first quarter, a 27.6% drop over the year-ago period. The stock's forward price-to-earnings (P/E) ratio is 16.2, lower than the apparel retailer industry average of 16.8. Ross Stores' price-to-sales ratio is 1.4, well below its 10-year median of 1.9.
Investors should weigh the risks from macroeconomic uncertainties and tariff impacts against the company’s resilience and discount retail niche before deciding if ROST is a buy or to be avoided. Ross Stores seems positioned to continue increasing its dividend in the years ahead, offering a potential investment opportunity for those seeking a sensible investment.
[1] Source: Ross Stores Q1 2022 Earnings Release [2] Source: Ross Stores Q1 2022 Earnings Call Transcript [3] Source: FactSet Earnings Insight: Ross Stores Inc. (ROST) Q1 2022 Earnings Preview [5] Source: Ross Stores Annual Report 2021
In the current uncertain economic climate, Ross Stores is reevaluating its annual guidance due to concerns about tariffs and inflation, affecting both its business and investing prospects. Despite the recent lower EPS and sales figures in Q1 2022, Ross Stores maintains a strong financial position, offering significant dividend growth potential and an attractive valuation for long-term investors.
