Ross Stores, Inc. (ROST) Earnings

Management highlights

- Core Business Performance * Delivered 10% comp sales growth driven primarily by increased customer transactions, with strength in new customer acquisition, lapsed customer return, higher shopping frequency from existing customers, and higher average spending per visit. * New customers span all income demographics and age cohorts, including younger shoppers, matching the demographic profile of existing customers and confirming broad brand appeal. * Comp growth was broad-based across all categories and regions, with sequential monthly improvement through the quarter, July delivering the strongest performance despite tough year-over-year comparisons. * Merchandising and Vendor Strategy * Merchandising teams expanded vendor networks and added more popular national brands, which has improved in-store assortment breadth and appeal across categories; strong vendor partnerships have strengthened as business growth has accelerated, with more vendors willing to work with Ross Stores and provide access to stronger assortments. * Home category growth accelerated to outpace company average, with particularly strong performance in decorative home and housewares (mid-teens growth); cosmetics has delivered consistent strong growth for multiple quarters. * Store and Operational Highlights * Store teams have improved in-store shopping experience, with better organization, faster inventory restocking, and shorter checkout lines, which has supported higher sales volumes and improved customer satisfaction. * New store performance has exceeded expectations, with locations in both existing and new markets (including the Northeast expansion) performing above planned targets. * Marketing and Customer Engagement * Updated marketing creative, adjusted media mix, and increased social media engagement (particularly Instagram) has driven strong customer acquisition and improved brand relevance, with measurable gains in younger customer traffic. * Inventory Management * Higher inventory levels support increased customer traffic, expand in-store merchandise selection, and improve margins while maintaining strong inventory turnover; low clearance levels are maintained and the company retains flexibility to capitalize on closeout opportunities as they arise. * Shareholder Return * Repurchased 1.4 million shares for $319 million in Q2 under the approved $2.55 billion buyback authorization; remains on track to repurchase $1.275 billion of stock in full-year 2026.

Guidance

- New store opening guidance for 2026 is raised from 110 to 115 total new locations, with approximately 5-10 planned relocations and closures; 51 new stores are planned to open in Q3 2026, including 41 Ross and 10 DD's Discounts locations. - Third quarter 2026 guidance is raised: comparable store sales are forecast to grow 6% to 7% YoY, total sales are projected to increase 9% to 11% YoY, EPS is expected in the range of $1.75 to $1.83 (versus $1.58 YoY), and operating margin is projected to be 11.7% to 12.0% (up from 11.6% YoY). - Fourth quarter 2026 guidance is raised: comparable store sales are forecast to grow 4% to 5% YoY (against a 9% comp increase in Q4 2025), EPS is expected in the range of $2.17 to $2.26 (versus $2.00 YoY). - Full-year 2026 EPS guidance is raised to a range of $8.61 to $8.77 (versus $6.61 full-year 2025), including $0.60 per share from tariff refunds. - Long-term same-store growth algorithm remains unchanged at a 3% to 4% annual baseline, with management expecting to outperform this baseline in the near term as early-stage initiatives continue to roll out. - The 10 to 15 basis points of margin flow-through per 1% of comp sales growth model remains unchanged.

Segment performance

Ross Stores (consolidated): Q2 2026 total sales grew 13% year-over-year to $6.3 billion, with 10% comparable store sales growth, marking the second consecutive quarter of double-digit comp growth. Net income was $851 million, up from $500 million last year, and EPS reached $2.66, up from $1.56 YoY. First half 2026 total sales grew 17% to $12.3 billion, with 13% comp sales growth and EPS of $4.69, up from $3.03 H1 2025. Ross segment: Strong broad-based performance across all merchandise categories and geographies, with the Midwest delivering the strongest results; home and cosmetics were the top-performing categories. Ladies apparel was slightly below company average but broadly in line with overall growth, with strong performance in the juniors sub-category. DD's Discounts segment: Delivered solid broad-based sales growth across all merchandise categories and geographies, with performance on a two-year basis almost exactly in line with the Ross segment. Consolidated inventory: End-of-quarter inventories increased 18% YoY; packaway inventory represented 36% of total inventory, down from 38% last year.

Risks & headwinds

- Higher fuel prices are creating upward pressure on freight costs, which is a projected headwind for gross margin in the second half of 2026; fuel costs are unhedged, so material price changes from current levels could impact actual results relative to guidance. - The company faces ongoing competition for closeout merchandise from other off-price retailers, and competitive pricing pressure from mainstream retail chains that are increasing price investments in the back half of 2026. - All growth initiatives are in early stages, and successful implementation across the entire store portfolio and merchandise categories is not guaranteed, and actual results may differ from current expectations. - A potential slowdown in consumer demand could impact inventory turnover for the company's elevated inventory position, though management notes current inventory flexibility and strong turnover mitigate this risk significantly.

Analyst Q&A

• Q: Can you elaborate on what initiatives have the most runway to continue driving strong comp growth, beyond the strong results already posted?

  A: Management organizes key initiatives into three core areas: merchandising, store operations, and marketing. The merchandising team has expanded vendor networks and built stronger assortments, the store team has improved in-store organization and customer experience, and marketing has updated creative and adjusted media mix that has driven strong engagement. Management notes all initiatives are still in early stages of full chain-wide rollout, with significant remaining runway for additional growth. Management declined to share specific details to avoid competitors emulating their strategy.

• Q: Are you getting better access to higher-quality/better brand assortments from vendors, and how competitive is this for off-price retailers?

  A: Yes, management confirmed the company is gaining increased access to more popular, better quality brands from vendors, driven by the company's accelerating growth, improved in-store experience, and stronger brand relevance. Closeout merchandise opportunities overall are currently strong, and the company's strong recent growth has helped it secure more access to these opportunities compared to competitors at times, as some competitors may not need as much additional inventory.

• Q: Will sustaining current higher comp growth require structurally higher investment, or is most investment already reflected in the current cost structure?

  A: Unit growth expansion does require additional capital investment, but new stores deliver payback in 2-3 years, which has historically been the company's best investment. All other initiatives follow a test-and-learn approach: initiatives are first piloted, and only rolled out company-wide if they deliver positive P&L returns. Management has been able to implement new initiatives while maintaining leverage on payroll and SG&A, and no structural change to the cost structure or flow-through model is needed at this time.

• Q: With higher in-store inventory, what is the risk if consumer demand softens, and are new customers coming from mainstream retail or competing off-price players?

  A: Higher inventory was added to support stronger existing demand, and inventory turnover still remains strong with low clearance levels. The company maintains open-to-buy flexibility to adjust inventory levels if demand softens, so risk is limited. Mathematically, Ross has outgrown other off-price players over the past year, so it has gained share within the off-price sector, but it is also capturing significant share from mainstream retail as well. Management aims to grow the overall off-price sector while being the leading gainer within it.