Ross Stores, Inc. Q2 FY2027 earnings call

• Customer Growth & Engagement: Management reports strong growth in customer traffic driven by three sources: new customers, lapsed returning customers, and more frequent shopping trips from existing customers, alongside higher average spending per visit. New customers span all income, age, and demographic cohorts (including younger shoppers), matching the demographic profile of Ross's existing customer base, reflecting broad brand appeal and effective marketing. Both new and existing customers respond well to expanded merchandise selection, improved in-store experiences, and competitive value pricing.
• Merchandising & Vendor Progress: The merchant team has expanded vendor relationships, adding new national brands and refining category assortments to better meet customer demand. Strong sales growth and improved in-store presentation have strengthened vendor partnerships: more vendors that previously avoided off-price retail are now willing to partner with Ross, giving the company greater access to popular, higher-quality merchandise. Closeout merchandise availability remains strong, supported by softness in mainstream retail that creates more surplus inventory opportunities.
• Operational Improvements: The store operations team has enhanced the in-store experience by improving store organization, speeding up inventory restocking, and reducing checkout wait times, which has supported higher sales volumes and improved customer satisfaction. Inventory management remains strong: even with 18% higher total inventory, inventory turns remain fast, merchandise margins have improved, and clearance levels stay low, giving the company flexibility to capitalize on fall closeout opportunities.
• Store Growth: Management increased 2026 new store opening guidance from 110 to 115 total locations, driven by stronger-than-expected performance of recent new store openings in both existing and new markets. The 2026 plan also includes approximately 5 to 10 store relocations and closures. New stores are delivering sales above initial plan expectations, with the Northeast expansion performing particularly well. New store size remains largely unchanged from historical averages, with adjustments made on a site-by-site basis.

Ross Stores operates two retail chains: Ross and dd's DISCOUNTS. The company's consolidated total Q2 2026 sales grew 13% year-over-year to $6.3 billion, with 10% comparable store sales growth (driven primarily by higher customer transaction volume). This marked the second consecutive quarter of double-digit comparable store sales growth, with strength improving sequentially through the quarter: May sales were strong, and July delivered the strongest performance even against a strong year-ago back-to-school comparison. Broad-based sales strength was seen across all merchandise categories and geographies for both chains: home and cosmetics were the strongest performing categories for Ross, and the Midwest region outperformed other U.S. markets. dd's DISCOUNTS delivered solid broad-based sales across all merchandise categories and regions. Consolidated end-of-quarter inventory increased 18% year-over-year, with packaway inventory representing 36% of total inventory (down from 38% in the year-ago quarter). Consolidated Q2 2026 net income was $851 million, compared to $508 million in Q2 2025; diluted earnings per share (EPS) was $2.66, compared to $1.56 in the year-ago quarter. Year-to-date (first half 2026) total sales grew 17% to $12.3 billion, with 13% comparable store sales growth, and EPS of $4.69 compared to $3.03 in the first half of 2025. The 2026 results include a one-time benefit of $0.60 per share from tariff refunds.

• New Store Guidance: 2026 full-year new store openings are raised to 115, up from the prior guidance of 110 openings. 51 new stores are planned to open in Q3 2026, including 41 Ross locations and 10 dd's DISCOUNTS locations. Long-term, the company targets 5% annual unit growth, with the 2026 increase driven by accelerated completion of stores originally planned for 2027.
• Q3 2026 Guidance (raised from prior estimates): Comparable store sales are forecast to increase 6% to 7% year-over-year, with total sales expected to grow 9% to 11%. EPS is projected to be between $1.75 and $1.83, compared to $1.58 in Q3 2025. Operating margin is expected to range between 11.7% and 12.0%, up from 11.6% in the year-ago quarter, supported by comp sales leverage and slightly higher merchandise margins, partially offset by higher freight costs from elevated fuel prices.
• Q4 2026 Guidance (raised from prior estimates): Comparable store sales are forecast to increase 4% to 5% year-over-year, against a robust 9% comparable sales increase in Q4 2025. EPS is projected to be between $2.17 and $2.26, compared to $2.00 in Q4 2025.
• Full Year 2026 Guidance: Full-year EPS is now projected to range between $8.61 and $8.77, compared to $6.61 in full-year 2025. This guidance includes the $0.60 per share one-time benefit from tariff refunds.
• Long-term Comp Guidance: Management has not updated the historical long-term comparable sales growth target of 3% to 4%, as current growth initiatives are still in early stages. Management expects to outperform this historical baseline in the near term as initiatives roll out.

• Higher fuel prices increase domestic freight costs, which creates a headwind to gross margin that is already embedded in current guidance, but further unexpected fuel price increases would create additional downward pressure on margins.
• A broad slowdown in U.S. consumer spending could reduce customer traffic and sales growth, and impact inventory turns even with elevated inventory levels. Management notes the company maintains flexible open-to-buy capabilities to adjust inventory if consumer demand softens.
• Strong off-price sector competition for closeout merchandise could limit access to desirable inventory, though current closeout availability remains strong.
• Sustained above-trend comp growth depends on continued successful rollout of ongoing merchandising, marketing, and in-store initiatives, which remain in early stages and do not have guaranteed long-term results.

Q: What are the key drivers of current top-line momentum, and can growth be sustained through the back half of 2026 despite tough year-over-year comparisons? / A: The 10% Q2 comp growth is high-quality, driven mostly by higher transactions from three equally meaningful sources: new customers, returning lapsed customers, and more frequent visits from existing customers, all of which are broad-based across geographies and categories. Momentum accelerated through the quarter, with a very strong July (against a tough year-ago comparison) and positive early August trends. Most growth initiatives are still in early stages, with many partially rolled out, so management sees significant remaining runway to sustain growth through the back half.

Q: Are ongoing growth initiatives requiring structurally higher investment, and will you accelerate investment spending to lean into recent success? / A: Unit growth (new stores) does require additional capital, but this investment has a 2-3 year payback and is the company's highest-return use of capital. All other initiatives are rolled out via a test-and-learn process, where only successful pilots are expanded; to date, these initiatives have been implemented while still leveraging overall SG&A and store payroll costs. The 10-15 basis points of margin flow-through per 1% of comp growth model remains intact, and management plans to continue operating within the existing financial model for the foreseeable future, with no plans for material overinvestment at this time.

Q: How does improved brand relevance create a virtuous cycle for vendor partnerships and merchandise assortment? / A: Improved consumer-facing brand relevance makes Ross a more attractive partner for vendors that previously avoided selling to off-price retail. Vendors now see that Ross showcases products in a well-organized, positive in-store environment, and the brand's growing sales momentum benefits vendors as well. This has led to more new vendors opening partnerships, and greater access to popular national brands, which in turn improves the merchandise assortment for consumers, driving more customer traffic and sales.

Q: What is the opportunity for accelerated new store growth in future years, and how is the Northeast expansion performing? / A: The 5 additional new stores added to 2026 guidance are projects that were completed earlier than expected, not a signal of a permanent long-term acceleration. The long-term target remains 5% annual unit growth, aligned with the company's existing model. New store performance this year is running ahead of initial plan, and expansion into the Northeast is meeting or exceeding expectations, with a strong pipeline of future real estate opportunities.