Ross Stores Inc. (NASDAQ: ROST) shares were maintained as having an Overweight rating by Morgan Stanley analyst Alex Straton, who also increased the price target from $119 to $127. According to the analyst, the company’s Q3 revenues came in 4% higher than consensus estimates and above the high end of forecast, which was a very welcome development after the first two quarters of the year saw sequential declines.

As management adjusted its product lineup, comparable sales increased sequentially throughout the quarter and by 3 points on a three-year stack basis.

While traffic was still declining y/y in Q3, Straton said the declines were countered by higher AURs and an increase in the average basket size.

The business performed particularly well in Florida and Texas, particularly in border and tourist areas, while California underperformed as high gas prices restrained consumer spending.

The significant sales outperformance, combined with better-than-expected gross margin on improved buying & easing freight and in-line SG&A dollars, produced 3Q EBIT margin & EPS that were above estimates by 9.8% & $1.00, respectively.

Ross’ revised forecast seems modest because it anticipates a 300 basis point underlying decline in Q4 comps and a 100 basis point decline in total sales growth.

Despite praising management’s cautious stance in light of the hazy macroeconomic situation and persistent consumer pressure, Straton believes that there is still space for improvement in Q4 due to better sales trends, freight normalization, and greater inventory purchases.

According to her, the pressures that initially affected lower-income consumers in 1H are now affecting middle- and upper-class earners.

The analyst predicts that the cohort will downsize in 2023 and turn to value-oriented retailers like Ross as the pressures increase.