Ross Stores, Inc. Q1 FY2026 earnings call

- Core Business Performance Highlights: The company posted the highest comp store sales growth in its 40-year history, with 17% comp growth driven entirely by transaction growth and a double-digit increase in customer count. Growth in customer count was broad-based across all income levels, ethnicities, and age groups, with particularly strong growth among younger 18-24-year-old customers. The quarter started with strong February sales, a month the company had historically struggled with, as balanced inventory levels enabled strong demand, followed by solid mid-teen comp growth for the remainder of the quarter. Inventories at quarter-end were up 12% year-over-year, with in-season merchandise representing 64% of total inventory (up from 59% last year), leaving the company well-positioned entering the second quarter. 13 new Ross stores and 4 new dd's Discounts locations were opened in the first quarter, aligned with the company's full-year unit growth targets. New store productivity has outperformed management's underwriting expectations, particularly for new locations in the New York City area as part of the company's Northeast expansion. New stores continue to perform well after opening, and management expects 2026 new store productivity to beat the prior guidance range of 70-75% of mature store sales. The company completed its store refresh program for half of its existing store base, measuring positive sales impact and improved customer experience from the refresh, and has paused further work to evaluate additional changes to its store prototype and design for remaining locations. Closeout product availability in the market remains very strong, and the company has secured increased priority access to closeout opportunities due to its strong recent sales growth, leading to more early outreach from vendors for excess inventory. - Strategic and Cultural Initiatives: Management shifted the company's culture slightly from a stronger focus on risk aversion to a more growth-oriented, entrepreneurial approach, empowering faster decision-making to accelerate growth, while maintaining prudent risk management. The marketing team has shifted to modernized creative messaging and adjusted the company's media mix to drive stronger customer acquisition, with marketing spend as a percentage of sales remaining stable and delivering traffic growth leverage. Merchandising teams have expanded branded assortment across all categories, particularly adding more better and best price point brands to complement the company's existing value-focused assortment, while maintaining a strong offering across all price points to match varied consumer demand. Visual merchandising and store labor models are being updated to reallocate hours to customer-facing and sales driving activities, with the company still in the early stages of rolling out these changes.

Ross Stores operates two core store segments: Ross and dd's Discounts. For the first quarter 2026, consolidated total sales grew 21% year-over-year to $6.0 billion, with a 17% increase in comparable (comp) store sales driving overall top-line growth. Performance was broad-based across both segments: Ross delivered double-digit comp growth across all major merchandise categories, with ladies apparel and cosmetics posting the strongest results, and the Midwest region outperforming other geographies. dd's Discounts also delivered solid top-line sales growth with strong performance across all its merchandise categories and geographic regions. Consolidated net income for the quarter was $650 million, up from $479 million in the prior year period, with diluted earnings per share rising 37% to $2.02 from $1.47 year-over-year. Operating margin expanded 120 basis points year-over-year to 13.4%, with cost of goods sold 145 basis points lower: merchandise margin improved 85 basis points, occupancy costs leveraged 60 basis points on strong comparable sales growth, distribution costs declined 15 basis points, and domestic freight costs declined 10 basis points. These gains were partially offset by a 25 basis point increase in SG&A and buying costs from higher performance incentives.

- Second quarter 2026 (ending August 1, 2026) guidance: Comparable store sales are projected to increase 6% to 7% year-over-year, with total sales projected to grow 9% to 11%. Earnings per share is expected to be in the range of $1.85 to $1.93, with operating margin expected to be 12.8% to 13.0% (up from 11.5% in the prior year second quarter). The company expects to open 47 new stores, 35 Ross and 12 dd's Discounts, during the second quarter. Net interest income is forecasted at $24 million, with an effective tax rate of approximately 25% and 320 million diluted weighted average shares outstanding. - Full year 2026 guidance was raised from prior levels to reflect the strong first quarter performance: Comparable store sales growth is now forecasted at 6% to 7% year-over-year, following a 5% comp gain in fiscal 2025. Full year diluted earnings per share is projected to be $7.50 to $7.74, representing 13% to 17% growth over the prior year's $6.61. The company maintains its target of 5% unit growth for fiscal 2026, with approximately 110 new store openings total: 85 Ross and 25 dd's Discounts, which does not include 10 to 15 planned closures or relocations of older stores. The company remains on track to complete $1.275 billion in share repurchases during fiscal 2026 under its approved authorization. Potential tariff refunds have been excluded from all forward guidance due to uncertainty around timing and final amounts. Full year capital expenditures are estimated at approximately $1 billion, up from $819 million in fiscal 2025. Long-term, management maintains a target of 5% annual unit growth, and would consider increasing the target if attractive real estate or market opportunities arise. Long-term, the company expects double-digit annual EPS growth, consisting of 3% to 4% annual growth from comparable sales and unit growth, plus 2% to 3% growth from share repurchases.

- Uncertainty around the timing and amount of potential tariff refunds, leading management to exclude these gains from guidance. - Elevated fuel prices are expected to pressure domestic and ocean freight costs through the remainder of the year, and this pressure is embedded in current guidance, though material changes in fuel prices from current levels could create further headwinds. - General macroeconomic uncertainty and sustained consumer pressure from inflation and higher energy costs could impact consumer spending behavior, though management notes that off-price retail often benefits from consumers seeking greater value during periods of economic uncertainty. - The company faces difficult year-over-year comparable sales comparisons in the second half of 2026 following strong first half growth, though management expects underlying momentum to deliver solid comp results. Forward-looking statements about future growth, store performance, and strategic initiatives are subject to risks and uncertainties that could cause actual results to differ materially from expectations, with key risk factors detailed in the company's SEC filings.

Q: Management delivered 17% first quarter comp growth, far above pre-pandemic levels of 4%. How durable is this growth, and will the company have to give back these gains over time? / A: Comp growth is driven primarily by increasing transaction count from growing customer numbers, which has been the case for three consecutive quarters, with even stronger growth this quarter. Growth is broad-based across all demographics, including younger customers, and management believes the momentum is durable because it comes from a flywheel effect: marketing brings in new customers, strong in-store experience and assortment converts shoppers to buyers, and incremental sales allow for more investment in labor and marketing. Only two temporary factors boosted the quarter: pent-up demand from historical first quarter conservatism, and higher tax refunds this year versus last; stripping these out, results are still very strong.

Q: The strong 17% comp growth was broad-based, but are there any notable category inflections driving acceleration quarter-over-quarter? Also, what is the expected earnings flow-through from comp sales growth this year? / A: Strength and sequential improvement were broad across all categories. Ladies apparel and cosmetics saw the strongest sequential improvement and outperformed the broader business, with juniors within ladies also posting very strong results. Every category posted positive high-single-digit or higher comp growth, so management is very pleased with overall performance. For earnings flow-through, every 1 percentage point of comp growth adds 10 to 15 basis points of margin, and first quarter results hit the high end of this range, which matched management's model. First quarter merchandise margin was slightly better than the baseline flow-through, but higher store payroll to support increased demand offset this, leaving results in line with expectations.

Q: With very strong new store productivity outperforming expectations, does management plan to change its long-term 5% annual unit growth target, and what is the outlook for Northeast expansion? / A: Management still models 5% annual unit growth over the long term, but would not hesitate to increase this target if attractive opportunities such as bulk real estate deals from bankruptcies arise. The Northeast expansion, particularly in the New York area, is performing far above underwriting expectations, with high population density matching or exceeding that of the company's mature California market. Approximately 20% of current annual new store growth goes to newer markets including the Northeast, and the expansion will continue with more openings planned for 2027, while existing core markets remain the focus of most new store growth.

Q: How much of the transaction growth comes from new customer acquisition versus higher frequency from existing customers, and what is the long-term EBIT margin outlook? / A: Transactions are primarily driven by new customer acquisition, and the company is seeing sequential improvement in the rate of customer count growth quarter-over-quarter. Long-term operating margin and EPS models have not changed: with 5% annual unit growth and 70% new store productivity, the company expects 3% to 4% annual EPS growth from core operations, plus another 2% to 3% from share repurchases, for total double-digit annual EPS growth. If comp growth exceeds the baseline 3% to 4%, the company will deliver even higher EPS growth.