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Why Goldman Sachs Downgraded Ross Stores Stock

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Stock down after rating downgrade

Ross Stores (ROST) stock fell 2.1% as of 3:41 PM ET today as Goldman Sachs downgraded the off-price retailer to “sell” from “neutral.” Goldman assigned a price target of $91 to Ross Stores stock, which reflects a possible downside of about 11% over the next 12 months. Goldman’s pessimistic view reflects execution setbacks associated with Ross Stores’ women’s apparel business and not much potential for gross margin improvement in the near term.

Goldman also downgraded upscale department store Nordstrom (JWN) to “sell’ from “neutral” on June 27. In general, Goldman expects the retail sector to be under pressure due to various factors, including potential supply chain disruption due to tariff tensions between the US and China.

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Off-price retailers Ross Stores and TJX Companies (TJX) have been performing better than many traditional brick-and-mortar players even amid intense competition from online retailers. However, Ross Stores has been facing continued pressure in the women’s apparel category. Also, the company’s profitability has been under pressure due to higher wages and freight costs.

Growth expectations

Ross Stores’ sales grew 5.8% to about $3.80 billion in the first quarter of fiscal 2019, coming in slightly ahead of analysts’ expectations. The company’s same-store sales grew 2.0% in the first quarter. Ross Stores’ first-quarter EPS rose 3.6% to $1.15 and beat analysts’ forecast of $1.12.

Ross Stores expects same-store sales growth in the range of 1%–2% in the second quarter of fiscal 2019, which reflects a slowdown compared to the 5% growth rate in the second quarter of fiscal 2018.

For full-year fiscal 2019, analysts expect Ross Stores’ sales to rise 6.1% to $15.9 billion and its adjusted EPS to rise 7.9% to $4.52.

As of June 26, Ross Stores stock had risen 23.1%, compared to a 18.1% rise in TJX Companies stock. The average 12-month price target of $100.95 for Ross Stores stock reflects upside potential of just 1%.

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