Shares of Ross Stores (ROST) advanced 4.12% to $68.23 early Friday morning after the off-price retailer reported better-than-expected results for the 2016 third quarter. However, the company issued cautious guidance for the holiday season.
"While 3Q top-line, margins, and EPS reflected another quarter of solid performance and came in ahead of consensus, we believe challenging near-term comparisons, a highly promotional holiday season, and wage pressures, coupled with a lofty valuation, prevent a favorable risk/reward ratio here," Jefferies wrote in an analyst note.
The Dublin, CA-based company said that concerns about the macro-economic, political and retail environments could lead it to sell more goods at a discount in the fourth quarter than it would prefer. Ross also noted that it faces "challenging multi-year sales comparisons" as it enters the holiday season.
Jefferies believes the off-price channel should continue to benefit from its "attractive" market positioning and resilient business model, but the firm said current valuation already includes positive sentiment for Ross stock.
The company's comparable-store sales rose 7% during the third quarter, which topped Wall Street's expectations for an increase of 2.6%, according to FactSet. Comparable-store sales were helped by higher traffic and an increase in average basket size, which refers to the number of items sold in a single purchase.
"From a category perspective, shoes and home were highlighted as outperformers, and ladies' apparel continued to strengthen. That said, there were pockets of weakness in the assortment, including accessories where management pointed to struggles," the firm added.
During the 2015 fourth quarter, Ross reported a comparable-store sales gain of 4%, and 6% growth in 2014 which could make comparisons "difficult" this year, according to Jefferies. Ross projects comparable-store sales increasing between 1% and 2% in the current period.
BMO Capital Markets estimates that the company's operating margin is near peak level and believes that meaningful upside must come from better-than-expected sales growth.
"TJX said it, and now ROST is saying it. The market for goods remains plentiful for off-price buyers, enabling them to enter a quarter light on inventory and then 'chase' popular categories as they see consumer trends develop. We view this favorably for the off-price channel as it gives the companies greater flexibility to react to the consumer and execute properly," the firm added.
Ross also upped its full-year earnings per share guidance to range between $2.78 and $2.81 vs. its prior view for earnings of $2.69 per share to $2.75 per share.
Jefferies maintained a "hold" rating on the stock, but increased its price target to $59 from $57. BMO Capital has a "market perform" rating on shares and raised its price target to $65 from $62.
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