New CEO Jim Conroy Will Improve Merchandising To Meet Consumer Preferences

Key Takeaways

• Strong merchandising and branding strategies are expected to align with consumer preferences, improving revenue and net margins.
  
• Strategic expansion and store optimization could enhance sales revenue and net income by boosting store productivity.
  
• Ross Stores faces revenue and margin pressures due to merchandising execution issues, leadership transition risks, and market uncertainties impacting costs.

Catalysts

Operates off-price retail apparel and home fashion stores under the Ross Dress for Less and dd’s DISCOUNTS brand names in the United States.

• The appointment of Jim Conroy as CEO-elect is expected to bring leadership skills and experience that could enhance management efficiency and strategically bolster merchandising, potentially improving earnings and net margins.
  
• Opportunities to improve merchandising execution and product offerings, including stronger branding strategies, are anticipated to positively impact revenue growth as they align more closely with consumer preferences.
  
• dd's DISCOUNTS has shown strong performance with better value and fashion offerings, which could drive comparable store sales growth, thereby positively affecting revenue and net income.
  
• The ongoing stock repurchase program, with a buyback total of $1.05 billion for the year, is likely to enhance earnings per share by reducing outstanding shares.
  
• Strategic expansion with the addition of new store locations during 2024 and closing underperforming ones could improve overall sales revenue and net income by optimizing store productivity.

Ross Stores Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ross Stores's revenue will grow by 5.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.0% today to 10.4% in 3 years time.
• Analysts expect earnings to reach $2.6 billion (and earnings per share of $8.25) by about December 2027, up from $2.1 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.1x on those 2027 earnings, up from 23.5x today. This future PE is greater than the current PE for the US Specialty Retail industry at 16.4x.
• Analysts expect the number of shares outstanding to decline by 1.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.99%, as per the Simply Wall St company report.

Ross Stores Future Earnings Per Share Growth

Risks

• Ross Stores faced disappointing sales results in the third quarter due to inability to effectively execute some merchandising initiatives and was impacted by severe weather, indicating potential continuing risks to revenue if such factors are not promptly addressed.
  
• The company's strategy of increasing the penetration of quality branded merchandise comes with the risk of further merchandise margin declines, which may negatively impact net margins if not properly managed.
  
• The transition of leadership to a new CEO might result in strategic or operational disruptions, impacting earnings stability if the new management does not align well with Ross's established strategies and culture.
  
• While comparable store sales increased by only 1% in the third quarter, Ross's guidance for the fourth quarter also includes projected declines in total sales by 1% to 3%, suggesting potential pressure on revenue growth.
  
• Market uncertainties such as tariffs and fuel costs pose additional risks to the cost structure, which could negatively affect operating margins and overall earnings if they result in unexpected cost increases that Ross is unable to mitigate.

Valuation

• The analysts have a consensus price target of $169.0 for Ross Stores based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $190.0, and the most bearish reporting a price target of just $124.09.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $25.1 billion, earnings will come to $2.6 billion, and it would be trading on a PE ratio of 25.1x, assuming you use a discount rate of 7.0%.
• Given the current share price of $150.85, the analyst's price target of $169.0 is 10.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.