Ross Stores (NASDAQ:ROST) reported earnings Tuesday before the bell and got sold hard in the aftermath.
What was the terrible news? Well, Ross stock beat earnings and fell slightly short on revenue estimates. Margins were pinched by higher transport costs and rising wages, but not terribly so. Same-store sales were around 3%.
The big killer was the fact that ROST guided lower for Q4.
And the same thing happened to its chief discount retail rival TJX Companies (NYSE:TJX). It also had a solid Q3 but has lowered guidance for Q4.
Some of this is because the trade war with China has shown no signs of relief and may even get worse. Many of the items that are sold at ROST stock are manufactured in China, or are assembled there. So increasing costs are either eaten by the company — which hurts margins — or are passed along to consumers — which can hurt revenue.
Either way, that would cause most companies to prefer to lower expectations from the holiday season.
Adding to that, the National Retail Federation has projected that holiday sales will increase between 4.3% and 4.8% this year. That’s not a huge number, but it’s certainly better than years past when sales were flat, or worse.
ROST and Online Retail
Another challenge for Ross stock will be the fact that it doesn’t have an online retail engine.
In an age where most retailers have robust e-commerce sites to sell to consumers anywhere they can, ROST (and TJX) rely on their “treasure hunting” model. That means their customers like to come into the stores and discover bargains that are on the racks, rather than search them out online.
While this approach certainly occupies a unique niche among retailers, the risk is that shoppers continue to move from physical shopping to online shopping. At this point, it doesn’t seem to be bothering ROST stock too much but with a company this size, you don’t want to wait for signs of trouble before trying to do something. Revamping its retail strategy would take at least a year or two and it pays to be proactive, rather than reactive.
However, at this point, there’s no sign any of this is a genuine concern. Right now, the markets are punishing any stock that delivers bad news for Q4.
The good news here is the economy is certainly showing signs of strength. The budget-conscious consumer isn’t going away anytime soon, given that millennials and Gen Xers are carrying huge amounts of student debts. And shopping at brick and mortar stores still remains popular.
This is why Ross stock hangs on to its A rating in my Portfolio Grader. Its long-term record of success and the new generation of customers it appeals to are very important in keeping the brand at the forefront of consumers’ minds and keeping the revenue flowing. And that’s why, after the post-earnings selloff, the stock made a strong rebound.
Stocks like ROST are solid long-term plays, not quick-hit trades. And it has a lot more upside here than downside.
Louis Navellier is a renowned growth investor. He is the editor of four investing newsletters: Growth Investor, Breakthrough Stocks, Accelerated Profits and Platinum Growth. His most popular service, Growth Investor, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.