Ross Stores Inc NASDAQ: ROST shares dropped as much as 5% during Wednesday's trading session, despite the discount retailer's earnings report surpassing headline expectations. It was a similar reaction to their peers at Target Corporation NYSE: TGT, who underwhelmed investors this week despite a headline beat.
Like Target, Ross’ results showed that it’s not good enough to beat analyst expectations; your forward guidance has to give investors enough confidence to get involved soon. With equities struggling to find their rhythm after last year’s sell-off, investors are being picky and rightfully so.
What’s interesting about Ross is that while their shares sold off at yesterday’s open, they recovered into the close. This indicates that plenty of money on the sidelines wasn’t slow about buying into the longer-term opportunity, even if the near-term is a little uncertain.
With their shares now trading about flat from their pre-earnings price, there are several reasons MarketBeat readers should be considering getting involved too.
Leaving aside management’s forward guidance for the moment, Ross still managed to deliver a beat on earnings and revenue, which is more than can be said for a lot of consumer-focused companies out there right now. They also announced an 8% increase to their dividend, which companies only ever make when they’re confident in their ability to back it up with future reports. The dividend increase is considered one of the most bullish signals management can give investors and is not taken lightly.
However, that same management also guided lower for the coming quarter and full year. CEO Barbara Rentler told investors she’s now expecting between $4.65 and $4.95 for FY23, well below the $5.08 consensus, while Q1 EPS is expected to come in between $0.99 and $1.05, also well below the $1.18 consensus forecast.
While the initial selling seen in Ross shares at yesterday’s open suggest this spooked investors, the subsequent recovery into the close suggests they’re taking the cautious stance with a little bit of salt. Like Target, Rentler told investors that as the “macroeconomic and geopolitical environments remain highly uncertain, we believe it is prudent to remain conservative when planning our business.”
Fair enough, but that kind of stance, especially when coupled with the dividend raise, just screams upside surprises in this year’s earnings reports. The teams at both Robert Baird and Credit Suisse had no qualms in reiterating their Outperform rating on Ross stock yesterday, the former going so far as to boost their price target from $125 to $130. That points to further upside from where shares opened on Thursday of at least 20%, and were they to hit it would put them within a few dollars of 2021’s all-time high.
To get there, shares must break the downtrend that’s been in place since early January and has sent them lower by nearly 10%. Further signs of cooling inflation or a softening Fed would go a long way to effect this, as the red-hot cost of living is causing consumers to tighten their belts and go without. Ross shares are still up 60% from last summer's lows, and while this week’s earnings report didn’t blow the doors down, it has set them up for success in the quarters ahead.
Let’s see if shares can consolidate around the $110 mark in the coming sessions and if the bullish bid from yesterday can get them pointing north by the middle of the month.
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