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    ROST
    Earnings call· Jul 2025(Q2 FY26)

    ROSS STORES, INC. ROST

    Aug 21, 2025 Source

    Executive summary

    Ross Stores, Inc. Q2 FY26 — Solid Quarter with Sequential Sales Improvement and Tariff Mitigation

    Ross Stores delivered a solid Q2 FY26, marked by sequential sales improvement across categories and regions, and EPS exceeding guidance. The company effectively mitigated tariff impacts through various strategies, though these costs still pressured operating margins. Management maintains a cautious yet optimistic outlook for the second half, focusing on value proposition and operational efficiencies amidst macroeconomic uncertainties.

    Highlights

    5

    • Sequential improvement in sales trends was broad-based across nearly all major merchandise categories and most regions.

    • Q2 sales were in line with expectations, and EPS of $1.56 modestly exceeded the high end of guidance due to lower-than-expected tariff costs.

    • Comparable store sales increased by 2% in Q2, driven by slight increases in both traffic and average basket size.

    • The company exited the quarter with strong momentum, particularly from early back-to-school sales in July.

    • Effective tariff mitigation efforts, including vendor negotiations, sourcing diversification, and strategic pricing, helped offset impact.

    Concerns

    4

    • Operating margin decreased 95 basis points to 11.5% in Q2, primarily reflecting a 90 basis point negative impact from tariff-related costs.

    • Tariff-related costs had an approximate $0.11 per share negative impact in Q2.

    • Modest tariff pressure is anticipated in Q3 (estimated $0.07-$0.08 per share), though expected to be further mitigated in Q4.

    • Q3 operating margin is planned to be 10.1% to 10.5%, including a 50-60 basis point negative tariff impact and continued deleverage from a new distribution center and unfavorable packaway timing.

    Guidance & targets

    13
    CategoryTargetConfidence
    Comparable store sales growth
    up 2% to 3%
    high materiality
    Medium
    Comparable store sales growth
    up 2% to 3%
    high materiality
    Medium
    EPS
    $1.31 to $1.37
    high materiality
    Medium
    EPS
    $1.74 to $1.81
    high materiality
    Medium
    Full-year EPS
    $6.08 to $6.21
    high materiality
    Medium
    Total sales growth
    increase 5% to 7%
    medium materiality
    Medium
    New store openings
    approx. 90
    medium materiality
    High
    New store openings (Q3)
    40 stores (36 Ross, 4 dd's)
    medium materiality
    High
    Store closures/relocations
    10 to 15 older stores
    low materiality
    High
    Operating margin
    10.1% to 10.5%
    high materiality
    Medium
    Net interest income
    approximately $27 million
    low materiality
    High
    Tax rate
    about 25%
    low materiality
    High
    Diluted shares outstanding
    approximately 323 million
    low materiality
    High

    Segment performance

    5
    SegmentRevenueYoYQoQMargin
    Ross
    Comparable store sales were up 2%, aligning with the overall company performance. The ladies business within Ross showed strong positive comparable sales, outperforming the chain average.
    		—up 2%——
    dd's DISCOUNTS
    Comparable store sales were solid and performed ahead of Ross. Both dd's and Ross saw growth in traffic and basket size, with strong momentum exiting the quarter.
    		—solid and ahead of Ross——
    Cosmetics
    Cosmetics was identified as the best merchandise area during the quarter, contributing significantly to the overall positive sales trend.
    		—very strong——
    Southeast
    The Southeast region was one of the strongest geographic markets for the company in Q2.
    		—strongest market——
    Midwest
    The Midwest region was one of the strongest geographic markets for the company in Q2.
    		—strongest market——

    Operational metrics

    35
    Total sales
    $5.5 billionup 5% YoY
    Q2 FY26

    Compared to $5.3 billion in the prior year period.

    Total sales
    $5.3 billion
    Q2 FY25

    Prior year period total sales.

    Net income
    $508 million
    Q2 FY26

    For the 13 weeks ended August 2, 2025.

    Net income
    $527 million
    Q2 FY25

    Prior year period net income.

    EPS
    $1.56
    Q2 FY26

    Includes an approximate $0.11 per share negative impact from tariff-related costs.

    EPS
    $1.59
    Q2 FY25

    Prior year period EPS.

    Tariff impact on EPS
    -$0.11
    Q2 FY26

    Negative impact included in Q2 EPS.

    EPS
    $3.03
    H1 FY26

    For the first 6 months of fiscal 2025.

    Net income
    $987 million
    H1 FY26

    For the first 6 months of fiscal 2025.

    EPS
    $3.05
    H1 FY25

    Prior year first 6 months EPS.

    Net income
    $1 billion
    H1 FY25

    Prior year first 6 months net income.

    Total sales
    $10.5 billionup from $10.1 billion
    H1 FY26

    For the 2025 year-to-date period.

    Total sales
    $10.1 billion
    H1 FY25

    Prior year first 6 months sales.

    Comparable sales
    up 1%
    H1 FY26

    For the first half of 2025.

    Operating margin
    11.5%decreased 95 bps
    Q2 FY26

    Primarily reflecting tariff-related costs.

    Tariff impact on operating margin
    -90 bps
    Q2 FY26

    Negative impact included in Q2 operating margin.

    Cost of goods sold increase
    70 bps
    Q2 FY26

    Increase during the period.

    Domestic freight costs
    lower 15 bps
    Q2 FY26

    Partially offsetting higher costs.

    Buying costs
    lower 10 bps
    Q2 FY26

    Partially offsetting higher costs.

    Shares repurchased
    1.9 million
    Q2 FY26

    During the second quarter.

    Share repurchase cost
    $262 million
    Q2 FY26

    Aggregate cost for shares repurchased in Q2.

    Full-year share repurchase target
    $1.05 billion
    FY26

    Company remains on track to buy back this amount for the year.

    Full-year tariff impact on EPS
    $0.22 to $0.25
    FY26

    Anticipated impact from announced trade policies for fiscal 2025.

    Prior year Q4/FY benefit from packaway facility sale
    $0.14
    Q4 FY25 / FY25

    One-time benefit to earnings in last year's fourth quarter and fiscal year results.

    Total consolidated inventories
    up 5%YoY
    Q2 FY26 end

    Compared to last year.

    Average store inventories
    up 5%YoY
    Q2 FY26 end

    Compared to last year.

    Packaway merchandise as % of total inventories
    38%vs 39% last year
    Q2 FY26 end

    At quarter end.

    AUR change
    low single-digit
    Q2 FY26

    Very modest change in average unit retail.

    China tariff rate
    145%
    Historical

    Historical rate mentioned in context of vendor pre-ticketing changes.

    DC capital as % of total capital
    28%
    FY26

    A little over 28% of total capital is devoted to DC capital this year.

    Long-term new store growth
    5%
    Long-term

    Part of the long-term earnings algorithm.

    New store productivity
    60%
    Long-term

    New stores are in the 60% range, contributing to EPS growth.

    Long-term EPS growth (from 3% comp)
    double-digit
    Long-term

    Based on a 3% comparable store sales growth, 5% new store growth, and 2-3% stock buyback.

    Self-checkout stores
    80
    Current

    Number of stores currently piloting self-checkout.

    Store refreshes completed
    half of stores
    FY26

    Expected to be completed this year, with the entire chain by 2026.

    Industry KPIs

    8
    MetricValueDetails
    Sg a OPEX ratio25 bpsbps
    Comparable sales2%%
    Store count growth28 Ross, 3 dd'sstores
    Gross margin drivers-30 bpsbps
    Share buyback capital return$262 millionUSD
    Inventory position markdown riskup 5%%
    Same sku like for like inflationlow single-digit%
    Distribution supply chain cost economics55 bpsbps

    Deals & partnerships

    1
    Rite AidAcquisition of store locations from Rite Aid's bankruptcy deal.

    Acquired a number of stores, mostly in core West Coast markets, to strengthen the company's pipeline.

    Risks & headwinds

    7
    Ongoing uncertainty in the external environmentOngoing

    Unquantified

    Mitigation: Team's dedication and hard work to adapt quickly and execute ongoing initiatives.

    Macroeconomic environment uncertaintyBalance of the year

    Unquantified

    Mitigation: Maintaining a somewhat cautious approach to planning the business for the balance of the year.

    Tariff-related costsQ2, Q3, Q4 FY26 and full-year FY25

    -$0.11 per share negative impact in Q2; -90 bps on operating margin in Q2; -$0.07 to $0.08 per share in Q3; -$0.04 to $0.06 per share in Q4; -$0.22 to $0.25 per share for full-year FY25

    Mitigation: Multipronged approach including vendor negotiations, diversifying sourcing mix, adjusting prices strategically, and expanding closeout business. Expectation that tariff impact will get smaller between Q2 and Q4.

    Unfavorable timing of packaway-related costsQ3 FY26

    Significant headwind in Q3

    Mitigation: Expected to be recouped in Q4 based on year-end inventory flow.

    Continued deleverage from new distribution centerBalance of the year

    Unquantified deleverage

    Mitigation: As the new DC ramps up production, it will put pressure on DC costs for the balance of the year, but leverage is expected over time as sales grow.

    Hispanic customer underperformanceJune Q2 FY26

    Stores with high concentration of Hispanic population underperformed the chain in June, especially in Southern California.

    Mitigation: Saw a bounce back in July, indicating potential recovery.

    Higher prices across the retail industryOngoing

    Unquantified, but noted as a trend

    Mitigation: Focused on maintaining value proposition relative to traditional retailers while balancing opportunity to preserve merchandise margin. Will be cautious about raising prices and will follow industry movement.

    What to watch in Q3 FY26

    5

    Q3 Comparable Store Sales Growth

    next quarter
    Currentup 2% in Q2
    Targetup 2% to 3%

    Why it matters

    Verifying if the company's cautious optimism for H2 sales materializes and if the sequential improvement continues as guided.

    For both the third and fourth quarters, we are planning comparable store sales growth of up 2% to 3%.

    Q&A highlights

    5

    Can you elaborate on the sequential top-line improvement, the sharp July rebound, and the conservatism embedded in the 2-3% comp guide? Also, gross margin drivers for Q3/Q4.

    Sequential improvement was broad-based across categories and regions, with strong momentum exiting Q2, especially in July. Cosmetics and ladies business were strong. The 2-3% comp guide for H2 includes conservatism due to macro uncertainty. Tariff impact on operating margin was 90 bps in Q2, mainly product cost and DC processing. H2 tariff pressure on merchandise margin will be lower, and distribution impact will wane. Packaway timing will pressure Q3 but recoup in Q4, and new DC ramp-up will pressure DC costs.

    “On the first part of your question, I'll give you some color on the specifics, but the most encouraging thing was we've seen broad-based sequential improvement from the first quarter into the second quarter. nearly every merchandise category improved and most were positive in the second quarter.”

    asked by Matthew Boss · answered by James Conroy

    2 min read5 chapters

    Detailed Narrative

    01

    Store Refreshes and Operational Initiatives

    Ross Stores is undertaking a store refresh program, expecting to complete about half of its stores this year and the entire chain by 2026. These refreshes involve updating signage and addressing cosmetic repairs. The company is also piloting self-checkout in approximately 80 stores, which has been successful in reducing line lengths and controlling shortage, with plans for expansion to high-volume stores next year to improve customer throughput.

    02

    Marketing and Brand Strategy

    New marketing campaigns have been launched: 'Work Your Magic!' for Ross, focusing on branded value with an emotional connection, and 'Don't sleep on dd's' for dd's DISCOUNTS, an entirely digital campaign targeting platforms like Meta and TikTok. These initiatives aim to reinforce the value proposition and engage customers more effectively.

    03

    Real Estate and New Market Expansion

    The company maintains a healthy real estate pipeline, leveraging store closures from other retailers. Ross recently acquired several stores in the Rite Aid bankruptcy, primarily in core West Coast markets, strengthening its pipeline for 2026 and accelerating dd's growth. New market entries in Puerto Rico (3 stores) and the New York Metro area have exceeded initial expectations, indicating strong potential for expansion in these regions.

    04

    Merchandise Category Performance

    Cosmetics continued to be the best-performing merchandise area. The ladies business, a key focus of the branded strategy, showed strong positive comparable sales, outperforming the chain average, particularly in young contemporary and juniors. The home business, while initially complicated and comp-eroding, turned slightly positive in July, with optimism for future performance following organizational adjustments.

    05

    Long-Term Growth Algorithm

    The long-term growth algorithm for Ross Stores includes approximately 5% new store growth, with new stores achieving around 60% productivity. This, combined with a 3% comparable store sales growth and a 2-3% stock buyback, is expected to drive double-digit EPS growth. The company sees significant white space opportunities for unit growth and acceleration, supported by its supply chain capabilities.

    AI-generated summary of the company’s earnings call. Not investment advice.