On Cusp of The Anniversary
ROST is inching closer to anniversarying one of the best periods in history for off-price inventory acquisitions. Add to that eight quarters in a row of inventory declines (while sales have accelerated) and it’s hard to envision anything but a deceleration in momentum is on the horizon.
Another quarter of strong results for ROST, with 3Q EPS of $0.84 coming in inline with the Street and recently raised guidance. Embedded in the results are well controlled inventories (down 7% against a 12% total sales gain), coupled with solid same store sales, which ultimately was the key driver of substantial gross margin expansion (up 340 bps). There’s a lot to like about the quarter except that the results are now in the past and it’s time to look ahead. 3Q09 marks the 8th quarter in a row where the company as reported a decline in inventories and a positive sales/inventory spread. The combination of better buying (i.e lots of quality goods at great prices) and impressive inventory management per foot has yielded dramatic gross margin expansion.
All of this is evidenced below as both ROST and TJX are among a very short list of companies that have hovered in the “Sweet Spot” of our SIGMA analysis for so long. With management’s reiteration of prior 4Q guidance below the Street ($0.88-$0.94 vs. Street of $1.00), it’s hard to ignore that this stellar run may be slowing on the margin. Expectations remain high here and the opportunity for further margin expansion at as great a pace as we’ve seen is just not likely. Inventory reductions, shrinkage, fuel cost benefits, and favorable buying conditions are all slowing on the margin and will no longer provide the tailwind necessary to keep momentum moving forward at the current pace.
*Note that there is an r-squared of 0.9x of stocks going down when the SIGMA line turns south in quadrant 1.