Ross Stores Inc.’s lower-income customer is feeling the squeeze of inflation and pulling back on their purchases from the off-price retailer, driving a first-quarter profit and sales miss and sending the stock down more than 21% on Friday.
Chief Operating Officer Michael Hartshorn says the average Ross customer has a household income of $60,000 to $65,000, while the household income of the average dd’s Discounts customer is in the $40,000 to $45,000 range. Ross Stores portfolio includes dd’s Discounts.
As Chief Executive Barbara Rentler said on the earnings call, “dd’s Discounts performance in the first quarter trailed that of Ross, as the significant benefit of last year’s stimulus and escalating inflationary pressures had a larger impact on lower income households,” according to FactSet.
Hartshorn added that the “inflationary environment was much more than we expected when we entered the year.”
Executives noted last year’s government stimulus and pent-up demand, which made this year a difficult one to predict.
“Just three months after surprising investors with a better-than-feared initial 2022 outlook, Ross Stores reported one of the most surprising/disappointing prints we’ve seen from them in 10+ years,” Wells Fargo said.
Analysts there rate Ross Stores equal weight with a price target of $80, down from $90.
Ross Stores’ share decline also dragged down Burlington Stores Inc.
which was down 11.9% in Friday trading. Burlington is scheduled to report first-quarter earnings on May 26.
Credit Suisse advises taking a long view of the off-price sector.
“TJX’s inventory up +37% year-over-year (versus sales +13%), guidance for U.S. same-store sales to accelerate 4% to 5% in 2H ((from -1% to -3% in 2Q), and raising its margin guidance for the year tells us that this business is prepared to deliver excellent value to consumers (right as households budgets come under pressure) with the right kind of inventory to start expanding margins while sales accelerate,” wrote analysts led by Michael Binetti in a TJX note.
“We think the stage is set for big share gains for TJX and the off-price group in 2H and beyond.” Credit Suisse rates TJX outperform with a $75 price target.
BMO Capital Markets also suggest taking a long view.
“We continue to see Ross Stores as a long-term share taker, but also recognize a very high short-term bar to own Consumer Discretionary,” analysts led by Simeon Siegel wrote.
BMO rates Ross Stores outperform with a $99 price target, down from $116.
Ross Stores shares have slumped 36.5% for the year to date. TJX is down 22.4% for the period. And Burlington is down 46.7% for 2022 to date.