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.