Ross Stores, Inc. ROST reported solid third-quarter fiscal 2017 results, wherein both the top and bottom lines topped estimates and improved year over year. Further, earnings came ahead of the company’s projection despite the tough year-over-year comparisons, volatile retail environment and the impact of two major hurricanes during the quarter.

Driven by the continuation of trends witnessed in the third quarter, the company raised its sales view for the fiscal fourth quarter. Also, a sturdy year-to-date performance and robust fiscal fourth-quarter projections encouraged management to perk up its earnings view for fiscal 2017.

Consequently, shares of Ross Stores jumped 8.1% in the after-hours session yesterday. Moreover, the stock has gained 19.5% in the last three months, outperforming the industry’s 6% upside.

Ross Store posted earnings of 72 cents a share that surpassed its guidance range of 64-67 cents and the Zacks Consensus Estimate of 67 cents. Earnings also improved 16.1% from 62 cents reported in the prior-year period.

Ross Stores, Inc. Price, Consensus and EPS Surprise

Ross Stores, Inc. Price, Consensus and EPS Surprise | Ross Stores, Inc. Quote

Total sales for the quarter rose 7.8% to $3,328.9 million and beat the Zacks Consensus Estimate of $3,273 million, driven by 4% increase in comparable-store sales (comps). Comps also surpassed the company’s expected rise of 1-2%. This can primarily be attributed to rise in traffic and increased average basket size.

Cost of sales increased 7.4% to $2,369.1 million and 30 basis points (bps), as a percentage of sales. The improvement was driven by a 25-bps rise in merchandise margin, as well as a 20-bps decline in both occupancy and buying costs. However, these were marred by higher freight and distribution expenses. Additionally, selling, general and administrative expenses contracted 35 bps due to leverage on comps gain and non-recurring costs incurred last year.

Operating margin expanded 60 bps to 13.3%, which was better than the company’s expectation of 12.4% and 12.6%. This outperformance stemmed from improved merchandise margins and leverage on higher-than-planned sales.

Store Update

The company’s expansion plan is on track with the inclusion of 10 new dd's DISCOUNTS stores and 30 Ross Stores in the fiscal third quarter. This marked the completion of its store opening target for fiscal 2017. The company had planned to open a total of 90 stores in fiscal 2017, comprising 70 Ross and 20 dd’s DISCOUNTS outlets.

Ross Stores expects to close fiscal 2017 with a total of 1,408 Ross and 213 dd’s DISCOUNTS stores.

Financials

Ross Stores ended the fiscal third quarter with cash and cash equivalents of $1,144.2 million, long-term debt of $396.8 million and total shareholders’ equity of $2,858.5 million.

During the reported quarter, the company bought back 3.6 million shares for $219 million. Year to date, the company repurchased a total of 10.5 million shares for $649 million. Evidently, it remains on track to repurchase $875 million worth shares in fiscal 2017 under its two-year $1.75 billion share repurchase program approved in February 2017. The company paid dividends worth nearly $186.5 million in the first three quarters of fiscal 2017.

Concurrent to the earnings release, the company announced a quarterly cash dividend of 16 cents per share, payable on Dec 29 to shareholders on record as of Dec 1.

Guidance

Following the solid fiscal third quarter, the company raised its sales view for the fiscal fourth quarter. The company now anticipates comps to increase 2-3% in the fiscal fourth quarter compared with the prior guidance of 1-2% growth. However, the company retained its earnings per share guidance of 88-92 cents versus 77 cents in the prior-year quarter. The company anticipates the benefit from increased comps to be offset by the certain expense timing shift into the fiscal fourth quarter this year.

In addition, the company expects sales growth of 11-12% in the fiscal fourth quarter, including a benefit from the additional 53rd week. Operating margin for the quarter is projected between 14% and 14.2% compared with 13.6% recorded in the year-ago quarter. Net interest expenses are estimated at about $1.5 million, while the tax rate is projected at 37-38%.

Based on the year-to-date performance and outlook for the fiscal fourth quarter, the company now projects earnings per share for fiscal 2017 in the range of $3.24-$3.28, including benefit from the additional week. On a 52-week basis, this represents growth of 12-13% from earnings of $2.83 delivered in fiscal 2016. Earlier, the company had projected earnings per share in the range of $3.16-$3.23 for fiscal 2017.

Notably, the company’s guidance for both fourth quarter and fiscal 2017 includes about 8 cents benefit from the inclusion of an additional 53rd week.

Zacks Rank and Key Picks

Ross Stores currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the same space include Big Lots Inc. BIG, Dollar General Corp. DG and Dollar Tree Inc. DLTR. All three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Big Lots has a long-term growth rate of 13.5% and posted positive earnings surprise of nearly 81.1% in the trailing four quarters.

Dollar General delivered a positive earnings surprise of 1.8% in the trailing four quarters and has a long-term growth rate of 11.3%.

Dollar Tree delivered a positive earnings surprise of nearly 5% in the trailing four quarters and has a long-term growth rate of 13.2%.