Ross Stores, Inc. (ROST) Earnings

Management highlights

- Overall Operational Results: Management reported an outstanding first quarter, with the highest same-store sales growth in the company's 40-year history, and credited cross-functional teamwork across marketing, merchandising, supply chain, and store operations for the strong performance. A portion of the quarter's outsized growth was attributed to larger tax refunds compared to last year, but management emphasized that underlying growth fundamentals remain very healthy. The quarter maintained strong momentum after a strong February start, a month where the company has historically underperformed. Comp growth remained solid in the mid-teens for the rest of the quarter. - Inventory: Consolidated inventory at quarter-end was up 12% year-over-year. Packaway inventory represented 36% of total inventory, down from 41% year-over-year. Management stated it is comfortable with the current overall level and composition of inventory entering the second quarter. Closeout product availability in the market remains strong, and the company is gaining priority first access to deals from vendors as its outsized growth has become more widely recognized. - Store Expansion: The company opened 13 new Ross locations and 4 new dd's DISCOUNTS locations in Q1 2026. It continues to target 5% annual unit growth, with plans for approximately 110 total new stores in full year 2026 (85 Ross, 25 dd's DISCOUNTS), plus plans to close or relocate 10 to 15 older stores. New store productivity has exceeded underwriting expectations, particularly in the new Northeast expansion market (including the New York area), and the pipeline for future store growth remains strong, with about 20% of new store growth allocated to newer markets. - Strategic Initiatives: The company has shifted to a greater growth focus, while maintaining prudent risk management. Key ongoing early-stage initiatives include updated modern marketing (with a re-focused media mix and creative messaging to drive customer acquisition), expanded branded assortment across price points including better/best price point additions, and in-store merchandising and labor model improvements focused on customer-facing sales driving activities. The cosmetics category has been a consistent outperformer for multiple quarters, driven by new brand additions and successful trend alignment (such as Korean beauty products), with higher square-foot productivity without increased space allocation. - Shareholder Returns: The company repurchased 1.5 million shares for $319 million in Q1 2026 under the approved 2-year $2.55 billion repurchase authorization, and remains on track to complete $1.275 billion in total share repurchases in full year 2026.

Guidance

- Second Quarter 2026 (ending August 1, 2026): Management projects comparable store sales growth of 6% to 7%, total sales growth of 9% to 11% year-over-year, and earnings per share in the range of $1.85 to $1.93. Operating margin is expected to be 12.8% to 13.0%, up from 11.5% year-over-year, driven by higher merchandise margin and lower distribution costs as the company anniversaries the 2025 opening of its new Arizona distribution center and 2025 tariff-related ticketing costs. 47 new stores (35 Ross, 12 dd's DISCOUNTS) are planned for the quarter. - Full Year 2026: Management raised full-year guidance following the stronger-than-expected first quarter, maintaining unchanged second half assumptions. Comparable store sales growth is now forecast at 6% to 7% on top of 5% growth in 2025. Full-year earnings per share is projected in the range of $7.50 to $7.74, representing 13% to 17% growth over 2025's EPS of $6.61. Guidance incorporates expectations for elevated fuel prices that will pressure freight costs for both domestic and ocean shipping for the full year. - Long-Term Guidance: Management reaffirmed its long-term target of 5% annual unit growth, double-digit annual EPS growth with 3% to 4% EPS growth from unit growth, 3% to 4% from comparable store sales growth, and 2% to 3% from share repurchases. Higher-than-target comp growth would result in outsized EBIT and EPS growth.

Segment performance

Ross Stores (the core banner): Delivered broad-based comp sales growth of 17% or higher across all major merchandise categories, with the ladies apparel and cosmetics segments as the top performing businesses. Geographically, performance was strong across all U.S. regions, with the Midwest posting the strongest results. dd's DISCOUNTS: Delivered solid top-line sales growth with strong performance across all its merchandise categories and geographic regions. Consolidated company performance: Total Q1 2026 sales grew 21% year-over-year to $6.0 billion, with comparable store sales up 17% overall. Comp growth was primarily driven by a strong increase in transaction volume, with double-digit growth in customer count across all demographic groups. Net income was $650 million, up from $479 million year-over-year, and operating margin expanded 120 basis points to 13.4%. Earnings per share grew 37% to $2.02, from $1.47 year-over-year.

Risks & headwinds

- Forward-looking statements about future growth, performance, and initiatives are subject to risks and uncertainties that could cause actual results to differ materially from expectations, with key risks detailed in the company's SEC filings. Potential tariff refunds have been excluded from guidance due to ongoing uncertainties around the timing and final amount of any reimbursement. - Elevated fuel prices present an ongoing headwind to freight costs, and material deviations from current fuel price forecasts would create additional cost pressure. The company monitors fuel prices closely to update projections as needed. - Macroeconomic uncertainty and inflationary pressures, including higher fuel and gas prices, could impact consumer behavior, though management notes that off-price retail typically benefits from consumer demand for value during periods of macro uncertainty, while also creating more closeout supply opportunities.

Analyst Q&A

• Q: What is the durability of the first quarter's 17% comp sales growth, given it is well above the company's pre-pandemic 4% average comp, and is any giveback expected? /

  A: Comp growth is heavily driven by higher transaction volumes, which have grown for three consecutive quarters with accelerating growth driven by double-digit increases in customer count. Growth is broad-based across all demographics, income levels, and geographies, including strong growth among younger shoppers. Management notes the growth is supported by an ongoing flywheel of new marketing, better in-store experiences, and compelling merchandise that brings new customers, drives higher sales, and enables further investment, with most initiatives still in early stages, so growth is expected to be durable. Only two temporary factors boosted the quarter: pent-up demand from historical conservative Q1 planning and larger-than-usual tax refunds, and underlying growth remains strong even excluding these.

• Q: How comfortable is management with inventory levels and the ability to continue sourcing product to support the 6% to 7% Q2 comp guide? /

  A: Management stated it is very comfortable with current inventory levels and product availability. Closeout product availability in the overall market remains strong, and the company's outsized recent growth has led to more vendors reaching out first with new deal opportunities. The company's merchandising team has successfully secured seasonally appropriate product to feed unexpected demand through the first quarter, and there is no concern about ongoing product availability.

• Q: Is the company planning to maintain its 5% long-term annual unit growth target, and are there changes to geographic expansion priorities after strong new store performance? /

  A: Management continues to model 5% long-term annual unit growth, but would not hesitate to increase the target if attractive opportunities (such as additional lease availability from retail bankruptcies) arise. The Northeast expansion (including the New York area) has far exceeded underwriting expectations, leveraging the region's high population density, and 20% of current new store growth is allocated to newer markets like the Northeast, with further expansion planned for 2027, while existing markets still account for most new store growth.

• Q: What is driving the cosmetics category's strong outperformance, and how durable is this strength? /

  A: The cosmetics category has been a standout performer for multiple quarters, driven by the merchandising team's strong execution, addition of popular new trending brands (including fast-growing Korean beauty lines), and alignment with current consumer preferences. No meaningful increase in space allocation for cosmetics has been made, so the growth comes from higher per-square-foot sales productivity. Management expects this strength to continue given the ongoing successful strategy for the category.