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What Drove Ross Stores’ Margin Expansion in Fiscal 2Q17

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Wider gross margin

Ross Stores’ (ROST) gross and operating margins expanded in fiscal 2Q17, which ended July 29, 2017. The company’s gross margin expanded ~25 basis points to 29.5% in fiscal 2Q17. The company’s gross margin expansion was driven by a wider merchandise margin, and lower occupancy costs and distribution expenses. However, a rise in freight costs and buying costs impacted the second quarter gross margin.

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Operating margin expansion

Ross Stores’ operating margin expanded 50 basis points to 14.9% in fiscal 2Q17 from 14.4% in fiscal 2Q16. This improvement was driven by better merchandise margins and a 25 basis points reduction in SG&A (selling, general, and administrative) expenses as a percentage of sales. The SG&A improvement included a one-time benefit of about 20 basis points from legal costs.

Rival The TJX Companies experienced contraction in its gross and operating margins in fiscal 2Q18, which ended July 29, 2017. The TJX Companies’ gross margin contracted 90 basis points to 28.5% in fiscal 2Q18 due to losses related to the company’s inventory hedges. The company’s operating margin narrowed to 10.8% in fiscal 2Q18 from 11.7% in fiscal 2Q17. The company’s operating margin was impacted by higher expenses, mainly increased wages.

In general, retailers’ and department stores’ margins have been under pressure due to a heavy promotional environment, higher wages, and investments to support online sales to fight rivalry from Amazon (AMZN). In fiscal 3Q17, which ends October 28, 2017, Ross Stores expects an operating margin of 12.4%–12.6%, compared with 12.6% in fiscal 3Q16. Continue to the final part of this series for a look at analysts’ recommendations for Ross Stores.

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