The earnings picture for the discount department store group has been a mixed bag, but there are two potential tailwinds retailers could soon enjoy.
After Ross Stores (ROST) - Get Ross Stores, Inc. Report reported a top and bottom line beat this week -- albeit with disappointing earnings guidance -- Morgan Stanley analysts noted that higher wage expense and freight costs could soon abate for the year, which could easily serve as a boon to the rest of the group.
"Moderating freight and wage pressures could yield second half 2019 EBIT [earnings-before-interest-and-tax] margin upside," analyst Kimberly Greenberg said of Ross Stores said in a post-earnings note. Greenberg's rating on the stock is overweight, with a price target of $94, against the current price of $92 a share.
Wage expense and higher freight costs have, at times, eaten into profits for retailers across the broader consumer sector in the past year or two, but that could soon change. "Freight expense deleverage peaked in second half 2018. This headwind should at least turn neutral in second half 2019," Greenberg said.
Her price target only represents marginal upside to the stock, but she indicated she may raise it as the higher operating margin isn't currently baked into her valuation. "Our modeled opex [operating expenses] assumptions for the remainder of 2019 could prove high as wage related pressures moderate."
Meanwhile, wage growth was 3.4% in April, a solid number for the current economic expansion, so it's certainly conceivable that growth could abate soon, as Greenberg pointed out.
Potentially lower wage and freight expenses would be a tailwind for Ross' peers TJX (TJX) - Get TJX Companies Inc Report , Burlington (BURL) - Get Burlington Stores, Inc. Report and Kohl's (KSS) - Get Kohl's Corporation (KSS) Report . Contrasting Greenberg's point, D.A. Davidson & Co. analyst John Morris doesn't see wage and freight costs abating quite yet. "Looking ahead into 2Q and the Spring season, we see a solid operating performance offset by near-term headwinds of freight and labor," he said of TJX in a note.
The direction of those two expenses will be an important driver of operating margins for the group in 2019.
More clarity on that picture will emerge when Burlington and Lululemon (LULU) - Get Lululemon Athletica Inc (LULU) Report report earnings May 30, 5 Below (FIVE) - Get Five Below, Inc. Report reports June 5, and Canada Goose (GOOS) - Get Canada Goose Holdings, Inc. Report reports June 21.
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