Ross Stores (ROST) Shares On Discount Today As Supply Chain Woes Hang Over Holiday Shopping Season

2:55 pm Friday, November 19th, 2021

In the wake of TJX’s (TJX) strong earnings report from two days ago, fellow discount retailer Ross Stores (NASDAQ:ROST) followed suit by posting its own top and bottom-line Q3 beat. Both companies experienced robust demand during the quarter, as illustrated by their matching comparable store sales growth of 14%, but TJX refrained from providing Q4 guidance. However, ROST did offer an outlook, and the result was not a positive one as the company guided Q4 EPS below consensus estimates ($0.83-0.93 vs. $1.00), while sounding the alarm on escalating supply chain and inflationary pressures.

Like TJX, the company’s assortment of off-price apparel and accessories are tailor-made for an inflationary environment. With dollars buying less and less these days, people are increasingly turning to discount retailers to stretch their buying power. Along with this heightened focus on value, pent-up demand for apparel, shoes, handbags, and accessories puts ROST in the wheelhouse of a shift in discretionary spending as people return to the office and go out again.

These favorable dynamics should continue throughout Q4, but worsening industry-wide supply chain congestion is threatening to put a dent in ROST’s holiday shopping season. Concerns about shipping disruptions and inflation are not only reflected in ROST’s downside Q4 EPS guidance, but also in its forecast for comparable store sales growth and operating margin. Despite lapping easier yr/yr sales comps in Q4, which were down by 6% in 4Q20 compared to down 3% in 3Q20, ROST expects sales comp growth to slow to 7-9% from 14% this quarter. At the same time, higher freight, wage, and COVID-related costs are expected to cut operating margin to 8.1-8.8% from 14% in Q3.

Adding to investors’ angst is the uncertainty as to when these headwinds will ease. Although off-price retailers tend to attract more shoppers during difficult economic conditions, they also tend to have less leeway with margins and can be disproportionately squeezed by rising costs. When asked about a potential timeline for an easing of inflationary costs and an accompanying margin recovery, COO Michael Hartshorn noted that it’s difficult to predict how much of the rise is temporary. He added that a rebound in margins will be dependent upon where and when those costs stabilize.