The Zacks Analyst Blog Highlights: Ross Stores, Kohl's, Wal-Mart Stores, Pepsico and Coca Cola

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Nov 18, 2011, 09:30 ET

CHICAGO, Nov. 18, 2011 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include Ross Stores Inc. (Nasdaq: ROST), Kohl's Corporation (NYSE: KSS), Wal-Mart Stores Inc. (NYSE: WMT), Pepsico Inc. (NYSE: PEP) and Coca Cola Company (NYSE: KO).

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Here are highlights from Thursday's Analyst Blog:

Ross Reports In Line, Sales Soar

Ross Stores Inc. (Nasdaq: ROST), one of the leading off-price retailers of apparels and home accessories, recently posted earnings of $1.26 per share for third-quarter 2011, which came in line with the Zacks Consensus Estimate.

Earnings grew 23.5% from the prior-year figure of $1.02 primarily due to the company's aptitude in providing attractive brand name bargains to customers who value both quality and price.

Let's Dig Deep

Net sales for the quarter increased 9.2% to $2,046.4 million from $1,874.3 million in the prior-year quarter, beating the Zacks Consensus Estimate of $2,041.0 million. This robust increase in net sales was primarily because of initiatives taken by the company to keep merchandise fresh by reducing the stock in stores and providing a wide range of fashion brands. Comparable store sales increased 5% during the period.

Higher merchandise gross margin and leverage on buying and occupancy expenses, partially offset by increased packaway-related distribution costs, led to a decline of 5 basis points in the cost of goods sold compared with the prior-year period.

Operating margin for the quarter expanded 45 basis points to 10.9%. The improvement in operating margin was primarily attributable to a 40 basis point reduction in selling, general and administrative expenses.

Other Financial Aspects

Ross Stores, which faces stiff competition from Kohl's Corporation (NYSE: KSS) and Wal-Mart Stores Inc. (NYSE: WMT), ended the quarter with cash and cash equivalents of $552.9 million, compared with $732.8 million in the prior-year period. During the first nine months of fiscal 2011, Ross generated $413.7 million of operating cash flows. This will enable the company to make capital investments, pay dividends and repurchase shares. At the end of the quarter, the company had a long-term debt of $354.1 million and shareholders' equity of $1,447.3 million.

The company has announced a 100% stock dividend by approving a two-for-one stock split to be payable on December 15, 2011 to shareholders of record as of November 29, 2011. In addition, Ross' board of directors declared a regular quarterly cash dividend of 22 cents per share or 11 cents per share post-split.

During the first nine months of fiscal 2011, Ross repurchased 4.5 million common shares for $343.0 million under its previous $900.0 million share repurchase program. Under its $900.0 million share repurchase program, valid through fiscal 2012, the company intends to repurchase $450.0 million worth of shares by 2011 end.

Guidance

For the fourth quarter of fiscal 2011, the company expects to generate earnings in the range of $1.53 to $1.59 per share with same-store sales rising 2% to 3%.

In its third-quarter 2011 earnings release, Ross Stores issued its fiscal 2011 earnings guidance between $5.54 and $5.61 per share.

Currently, we have a long-term 'Outperform' recommendation on the stock. Moreover, Ross Stores holds a Zacks #2 Rank, which translates into a short-term 'Buy' rating.

Pepsi Goes Low Calorie

In tune with the popularity for low-calorie products, Pepsico Inc. (NYSE: PEP) is set to launch mid-calorie drink 'Pepsi Next', which will hit shelves early next spring.

Pepsi Next has been designed to contain 60% less sugar, 60% fewer calories, and will be tested in two new markets next July.

Additionally, the retail giant had applied for trademarks for two more new-mid calorie drinks along with Pepsi Next, namely Mtn Dew Next and Sierra Mist Next.

Management has revealed that the mid-calorie drinks have been formulated to bind the consumers into the cola franchise. This is because people are abstaining from drinking cola as they are worried about high sugar and calorie content in the drinks. Reportedly, colas now account for about 55% of carbonated soft drink consumption, down from 65% in 1995.

Pepsi had tried its hands on mid-calorie drinks earlier. However, the earlier initiatives were not much of a success. Among them were Pepsi XL, containing 50% less sugar, launched in the 1990s, and Pepsi Edge, a 70-calorie soda, launched in 2004.

But management feels that nowadays the trends have changed and the drinks with lower calories enjoy higher demand than before. Moreover, management also cited that consumers had to previously choose between zero calories or full calorie. But there was nothing in between. Pepsi Next will be sweetened by four artificial sweeteners as it tries not to compromise on taste.

Pepsi's rival Coca Cola Company (NYSE: KO) had also tried to entice customers by its low calorie drinks, which were of no success. The low-calorie drinks Coke C2 and Coke Zero failed to create much hype in the market.

Both Coca Cola Company and Pepsi reported higher-than-expected sales in the recently ended quarter, as strong sales in emerging markets helped blunt the impact of ongoing weakness at home.

Currently, we prefer to be Neutral on Pepsi's stock. Furthermore, Pepsi holds a Zacks #3 Rank, which translates into a short-term 'Hold' rating.

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