By Sam Boughedda
Ross Stores (NASDAQ:ROST) was upgraded to Overweight from Equal Weight by Wells Fargo analysts on Tuesday.
They also raised the firm's price target for the company's shares to $110 from $90, stating that while they have been "fairly downbeat on the prospects for off-price over the past 12+ months," they continue to gain "optimism into the setup in the sub-sector into 2023 and beyond."
In a broad note on various stocks within the sector, the analysts explained that they see Ross Stores' negative revision cycle ending, with upside to Street numbers ahead.
"Despite recent challenges (and an estimated 150-200bps in structural margin headwinds post-COVID) we see fundamentals beginning to improve for the off-pricer space - leaving us optimistic in the setup into 2023 and beyond. Improving dynamics include: 1) growing inventory availability with key brands, 2) the potential to acquire a trade-down consumer once the pricing environment normalizes and 3) a visible freight recapture opportunity," explained the analysts.
"The trade-down consumer benefited the off-price top-line by nearly quadrupling market share gains from ~25bps YoY prior to the GFC up to 90-100bps through 2008/2009, but we have yet to see the return of this consumer to the off-price channel this year. Second, inventory availability has improved substantially as consumer spending has slowed. Also, off-pricers are preparing to capitalize on the opportunity with reserve inventory levels which are +100% YoY in preparation of returning traffic this holiday and next spring. Third, we see the opportunity for the off-pricers to recapture a substantial portion of the ~2000bps in cumulative freight headwinds that have impacted margins since 2019," the analysts added.
Ross Stores shares are up more than 6% so far in Tuesday's session.