Ross’ Value Proposition Preserves Sales, EPS Growth

We don’t expect to materially alter our $105 per share fair value estimate for narrow-moat Ross Stores after incorporating fourth-quarter results that modestly edged our forecast and a more tepid 2023 company outlook. In the fourth quarter, Ross delivered sales of $5.2 billion and EPS of $1.31, representing 3% and 26% growth, respectively. Sales were supported by a return to positive same-store sales growth (1%) and profits benefited from lower logistics and compensation costs in the period, which led to 90 basis points of operating margin expansion (10.7%). As consumers continue to shift away from goods to services, same-store sales have taken time to stabilize, as indicated by positive fourth-quarter comps, but full-year comps still contracted 4%.

Ross echoed the conservative rhetoric of numerous other consumer discretionary businesses this earnings season. As such, Ross sees 2023 sales rising 2%-5% on flat comps and EPS of $4.65-$4.95 (up nearly 10% at the midpoint). Given the lack of same-store sales growth, cost leverage will be harder to extract, and the operating margin is expected to be flat (10.3%-10.7%). However, while 2023 is set to track lower than our preprint 7.6% sales growth and $5.24 EPS forecasts, it doesn’t indicate the long-term growth algorithm for Ross has been derailed. We see no reason to adjust our long-term outlook for mid-single-digit sales growth, given that it is largely achievable through the 4% growth in locations we have planned over the next decade. And low-double-digit EPS growth is not at risk, with high-single-digit free cash flow to equity permitting further share repurchases on top of profit expansion. Although we’d prefer Ross repurchase shares at a discount to our intrinsic value, we expect it will fully utilize the $950 million it has remaining on its current authorization before the end of fiscal 2023. Although we believe Ross’ business model will continue to generate excess economic rents, we view shares as fully valued.