Ross Stores, Inc. (NASDAQ: ROST) Q2 2025 Earnings Call | 08/22/2025

Overview: Ross Stores, Inc. reported solid Q2 FY25 results, with sequential sales improvement driven by broad-based gains across merchandise categories and regions. The company highlighted effective tariff mitigation, store expansion, and operational initiatives, expressing cautious optimism for the back half of the year amid a dynamic macro environment.

Key Financial Highlights (Adam Orvis, EVP and CFO):

• Revenue: Total sales grew 5% to $5.5 billion, with comparable store sales up 2%. Year-to-date sales reached $10.5 billion, up from $10.1 billion, with a 1% comp increase.
• Earnings: Q2 EPS was $1.56 (net income $508 million), slightly above guidance but down from $1.59 in Q2 FY24 due to an $0.11 per share tariff impact. Year-to-date EPS was $3.03 (net income $987 million) vs. $3.05 in FY24.
• Operating Margin: Declined 95 basis points to 11.5%, driven by a 90 basis point tariff impact. Cost of goods sold rose 70 basis points (distribution costs +55 bps, merchandise margin -30 bps, occupancy -10 bps), partially offset by lower freight and buying costs. SG&A deleveraged by 25 bps due to CEO transition costs.
• Inventory: Total and average store inventories up 5%, with pack-away merchandise at 38% of total inventory (vs. 39% last year).
• Share Repurchase: Repurchased 1.9 million shares for $262 million, on track for a $1.05 billion buyback in FY25.
• Guidance: Q3 EPS projected at $1.31–$1.37 (vs. $1.48 in Q3 FY24), Q4 EPS at $1.74–$1.81 (vs. $1.79). Full-year EPS forecast raised to $6.08–$6.21 (vs. $6.32 in FY24, which included a $0.14 one-time benefit). Q3 and Q4 comp sales expected at 2–3%, with total Q3 sales growth of 5–7%. Tariff impacts estimated at 7–8 cents in Q3 and 4–6 cents in Q4, with a full-year impact of 22–25 cents. Q3 operating margin projected at 10.1–10.5%, reflecting tariff and pack-away costs and distribution center deleverage.

Operational Highlights (Jim Conroy, CEO):

• Sales Trends: Q2 saw sequential improvement from Q1, with strong May sales, a softer June, and a sharp rebound in July, driven by early back-to-school momentum. Cosmetics led merchandise categories, while the Southeast and Midwest were the strongest regions. Both Ross and DD’s Discounts saw growth in traffic and basket size.
• Tariff Mitigation: The merchandising team mitigated tariff impacts through vendor negotiations, diversified sourcing, strategic pricing, and increased closeout purchases. Tariff pressure is expected to ease in Q3 and Q4, with a new pricing equilibrium anticipated in FY26.
• Store Growth: Opened 28 Ross and 3 DD’s Discounts stores in Q2, including new markets in New York metro and Puerto Rico. On track for 90 new stores in FY25 (80 Ross, 10 DD’s), with 10–15 closures/relocations. Q3 plans include 36 Ross and 4 DD’s openings.
• Initiatives: Store refreshes (signage, cosmetic repairs) are underway, with half the chain expected to be completed in FY25 and the rest in FY26. Self-checkout pilots in 80 stores have reduced queue times and controlled shrinkage, with plans to expand to high-volume stores in FY26. New marketing campaigns (“Work Your Magic” for Ross, “Don’t Sleep on DD’s” for DD’s) aim to enhance customer engagement.
• Merchandise: Ladies’ apparel outperformed the chain average, driven by a branded strategy and strength in young contemporary and denim. Home lagged but turned positive in July after addressing receipt issues.

Q&A Insights:

• Sales Drivers: Q2 comp growth was driven by slight increases in traffic and basket size (via AUR and units per transaction). July’s strength and back-to-school trends support cautious 2–3% comp guidance for Q3/Q4, with some conservatism due to macro uncertainties.
• Tariff Strategy: Mitigation includes shifting buys, negotiating with vendors, and increasing closeouts, with minimal AUR increases (low single digits, mix-related). Pricing will align cautiously with industry trends to maintain value proposition.
• Consumer Trends: No significant shifts in customer income or demographic cohorts. Hispanic-heavy stores underperformed in June but rebounded in July.
• Distribution Centers: A new Arizona DC caused Q2 deleverage, with further pressure in Q3 but expected leverage in FY26–27 as volume grows. DC capital is ~28% of FY25 CapEx, with the next DC opening in 2–3 years.
• Long-Term Growth: The company sees potential to accelerate store growth beyond the current 90 stores annually, leveraging organizational capabilities and strong performance in new markets like Puerto Rico and New York metro.
• Profitability: The branded strategy initially pressures margins but is expected to improve as vendor relationships and closeout access strengthen. Long-term EPS growth is projected at ~10%, driven by 5% unit growth, 3% comps, 1–3% EBIT upside, and 2–3% buybacks.

Closing: Ross emphasized its value proposition, tariff mitigation, and store expansion to capture market share in a rising price environment. The company acknowledged Adam Orvis’s retirement and his role in ensuring a smooth CFO transition to Bill Sheehan.