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Ross Stores beats on FQ2 revenues and earnings, lifts EPS guidance

Ross Stores, a US-based operator of off-price retail apparel and home accessories stores, issued robust financials for its fiscal 2016 second quarter ended July 30. Revenues increased 7% y-o-y to $3.18 bn, backed by positive response from value-focused customers to the company’s extensive collection of brand bargains, and surpassed consensus estimate of $3.13 bn. Comparable-store sales rose 4%, driven by an increase in the size of average basket along with higher traffic. Operating income grew 10.8% to $460 mn, and operating margin improved 50 basis points to 14.4%. Adjusted earnings per share jumped 13% to 71 cents topping both the company’s guidance of 64-67 cents and analysts’ average projection of 67 cents.

Ross Stores ended FQ2 with cash and cash equivalents of $927.7 mn and long-term debt of $396.3 mn. During the reported quarter, the company bought back 3.1 mn shares for around $176 mn, bringing the year-to-date repurchases to about $352 mn. With this, the company remains on track to buy back $700 mn worth of shares in fiscal 2016. A quarterly dividend was 13.5 cents per share, which offers annualized dividend yield of 0.8%.

In FQ2, the company opened 24 new Ross and 7 dd’s DISCOUNTS stores and, as of Jul 30, operated 1,317 Ross Dress for Less stores across 34 states, the District of Columbia and Guam as well as 184 dd’s DISCOUNTS outlets across 14 states. In fiscal 2016, the company plans to open 90 new locations.

Though Ross Stores expects to face challenges related to strong y-o-y comparisons amid macroeconomic uncertainty and a volatile retail landscape, it remains confident of performing well going forward. As it enters the second half of fiscal 2016, the company remains committed to improve its merchandise assortments in the ladies’ apparel business, which struggled in the spring season. Ross Stores has improved its fiscal 2016 EPS guidance and now expects it in the range of $2.69-2.75 (growth of 7-10% y-o-y) compared with the previous forecast of $2.63-2.72.

I believe that shares of Ross Stores are well positioned to continue growth, with medium-term target at $70.