Executive Summary / Key Takeaways

• Ross Stores operates a highly successful off-price retail model through its Ross Dress for Less and dd's DISCOUNTS brands, leveraging opportunistic buying and efficient operations to offer significant value to middle- and moderate-income consumers.
• Recent performance shows resilience, with Q1 FY25 sales growing 3% to $4.98 billion, driven by new store openings, and comparable store sales flat year-over-year despite a slow start to the spring season.
• The company's strategic focus on enhancing branded value is resonating with customers, contributing to performance, though it has put some planned pressure on merchandise margins, now expected to be neutral going forward excluding tariff impacts.
• Significant uncertainty, particularly regarding elevated and potentially fluctuating tariffs on goods originating from China (over half of merchandise sold), has led management to withdraw full-year guidance, projecting Q2 FY25 EPS of $1.40-$1.55, including a $0.11-$0.16 tariff impact.
• Despite near-term margin pressure from tariffs and macroeconomic volatility, Ross's flexible business model, strong financial position ($3.8 billion cash, $1.3 billion credit facility), ongoing store expansion plans (approx. 90 new stores in FY25), and commitment to returning capital ($1.05 billion remaining buyback authorization) position it to potentially capitalize on market disruptions and continue long-term growth.

The Enduring Appeal of Off-Price: Ross Stores' Foundation

Ross Stores, Inc., established in 1957, has built a formidable presence in the U.S. retail landscape by perfecting the off-price model. Operating primarily under the Ross Dress for Less banner, the largest off-price apparel and home fashion chain in the country, alongside the more moderately-priced dd's DISCOUNTS, the company thrives on offering first-quality, in-season, name brand and designer merchandise at substantial savings – typically 20% to 60% off department and specialty store prices at Ross, and 20% to 70% off moderate department/discount store prices at dd's. This value proposition is particularly compelling for its core customer base of middle- and moderate-income households.

The company's history is one of consistent expansion and operational refinement. Growth has been fueled by a disciplined store opening strategy, targeting markets based on demographics, competition, and profitability. This approach continues to be a key driver, with plans to open approximately 90 new stores in fiscal 2025 (about 80 Ross and 10 dd's), building on the 89 locations added in fiscal 2024. This physical growth is supported by ongoing investments in the supply chain, including new distribution centers like the eighth facility opened in Buckeye, Arizona, in May 2025, and a ninth under construction in Randleman, North Carolina, aimed at supporting long-term growth and increasing efficiencies.

Operational Backbone and Technological Investments

The success of the off-price model hinges on efficient operations and a keen ability to manage inventory. Ross leverages opportunistic buying, acquiring excess inventory from manufacturers at deep discounts. This merchandise is then flowed through its distribution network to stores, often supplemented by "packaway" inventory stored for later release based on seasonality and assortment plans. As of May 3, 2025, packaway represented 41% of total inventory, similar to the prior year, reflecting the company's strategy to capitalize on purchase opportunities.

Supporting these operations are ongoing investments in technology, primarily focused on enhancing productivity and efficiency across the supply chain and in stores. While specific quantifiable performance metrics for these technologies are not detailed, the company has invested in information technology systems and merchant processes. In distribution centers, investments include automation such as automated vehicles, robots to build cartons, and automated sorting systems. In stores, initiatives like piloting self-checkout, introducing new handheld devices for inventory management and markdowns, and rolling out flexible scheduling are aimed at improving productivity and augmenting associate work. These technological efforts are strategic, intended to streamline operations, improve inventory flow, and provide merchants with better data visibility, contributing to the company's overall efficiency and ability to maintain its value proposition.

The Competitive Arena: Positioning and Rivals

Ross operates in a highly competitive retail segment, primarily facing off against other large off-price retailers like TJX Companies (TJX), Burlington Stores (BURL), and Nordstrom Rack (JWN's off-price division).

Compared to the market leader, TJX (TJX), Ross operates at a smaller scale (ROST's fiscal 2024 revenue of $21.1 billion vs. TJX's approximately $54.2 billion). TJX (TJX) generally exhibits slightly higher gross and operating margins (TJX TTM Gross Margin ~31%, Operating Margin ~11% vs. ROST TTM Gross Margin ~21.2%, Operating Margin ~12.2%), reflecting its larger scale and potentially more diversified sourcing and distribution network. TJX (TJX) also tends to have faster inventory turnover. However, Ross strategically positions itself with its dual-brand approach, particularly dd's DISCOUNTS, which targets a more moderate-income demographic than TJX's core banners, providing a distinct niche.

Against Burlington Stores (BURL), Ross demonstrates stronger profitability margins (BURL TTM Gross Margin ~43%, Operating Margin ~7%) and lower debt levels (ROST TTM Debt/Equity ~0.86 vs. BURL TTM Debt/Equity ~3.92), indicating greater financial stability and operational efficiency despite BURL's recent higher revenue growth rate (BURL TTM Revenue Growth ~10% vs. ROST TTM Revenue Growth ~3.4%). Ross's established supply chain and operational discipline contribute to lower per-unit operating costs compared to BURL (BURL), which is still heavily investing in rapid expansion.

Nordstrom Rack (JWN's off-price division), while part of a larger retailer (JWN TTM Revenue ~$15.5 billion), operates with lower profitability margins (JWN TTM Gross Margin ~37%, Operating Margin ~3%) and significantly higher debt levels (JWN TTM Debt/Equity ~3.76) than Ross's off-price segment. While Nordstrom Rack benefits from digital integration and a connection to the full-price Nordstrom (JWN) brand, Ross's core strength lies in its cost efficiency and focus on everyday value for its target demographic, giving it an edge in cost-sensitive segments.

Ross's technological investments, while not providing a distinct, quantifiable advantage over all competitors, are aimed at maintaining and improving the operational efficiencies that are foundational to its cost leadership competitive moat. The focus on supply chain automation and in-store productivity tools is crucial for keeping costs low and supporting the value proposition, directly countering the scale advantages of larger rivals like TJX (TJX) and the aggressive pricing strategies of others like BURL (BURL). The company's ability to effectively manage its supply chain, particularly concerning goods originating from China, is a shared challenge across the industry, but Ross's flexible buying model and packaway strategy are key operational levers in this environment.

Recent Performance and Strategic Execution

Ross delivered a solid performance in the first quarter of fiscal 2025, with total sales increasing 3% to $4.98 billion compared to $4.86 billion in the prior year period. This growth was primarily driven by the addition of 78 net new stores over the past year. Comparable store sales were flat year-over-year, which management noted was an improvement throughout the quarter after a slow start in February. The sequential improvement was broad-based across merchandise categories, with cosmetics being a standout performer and the ladies' business trending in line with or slightly better than the chain average.

Profitability in Q1 FY25 remained stable, with operating income as a percentage of sales flat at 12.2%. Cost of goods sold as a percentage of sales was also relatively flat, although merchandise margin saw a 45 basis point decrease, mainly attributed to higher ocean freight costs and the initial impact of tariffs. This was largely offset by improvements in buying costs (down 50 basis points due to lower incentives) and domestic freight (leveraged by 20 basis points). Selling, general and administrative expenses were flat as a percentage of sales, with the benefit of lower incentive compensation offset by sales deleverage. Net earnings decreased slightly to $479.2 million from $488.0 million, primarily due to lower net interest income resulting from lower cash balances after debt repayments. Diluted earnings per share saw a slight increase to $1.47 from $1.46, benefiting from a reduction in weighted-average diluted shares outstanding due to stock repurchases.

The company's strategic initiative to enhance branded value, which began last year, is viewed as successfully executed and is no longer expected to be a merchandise margin headwind going forward. This strategy, particularly focused on improving the ladies' business, is seen as key to driving market share gains by offering more compelling branded values to the customer. While longer-term initiatives to enhance the store environment and marketing are planned, they are expected to be pursued in an expense-neutral manner this year, balancing strategic vision with the current macroeconomic uncertainty.

Outlook and the Shadow of Tariffs

Looking ahead, Ross Stores faces a complex and uncertain environment, primarily clouded by the unpredictable nature of trade policy and its impact on costs. For the second quarter of fiscal 2025, the company projects comparable store sales to be flat to up 3%. Earnings per share are guided to be in the range of $1.40 to $1.55. This guidance explicitly includes a significant cost impact from announced tariffs, estimated at $0.11 to $0.16 per share. The projected operating margin for Q2 FY25 is 10.7% to 11.4%, reflecting a 90 to 120 basis point negative impact from tariffs, mostly affecting merchandise margin. Higher distribution costs related to the new Arizona DC are also expected to pressure margins, partially offset by lower incentive compensation.

Given the limited visibility into consumer demand evolution over the balance of the year, prolonged inflation, deteriorating consumer sentiment, and the potential for fluctuating tariff levels, management has prudently withdrawn its previously provided annual guidance for fiscal 2025. They acknowledge that over half of the merchandise sold originates from China, making the company susceptible to tariff increases, which may disrupt sourcing patterns and increase costs. While mitigation strategies are being employed, including working with vendors for better costing, leveraging closeouts already in the country, utilizing packaway inventory (much of which arrived prior to tariff increases), and exploring shifting country of origin (a longer-term adjustment), short-term pressure on profitability is possible. The company expects modest but broad-based inflationary pressure across the retail industry and remains focused on maintaining its pricing umbrella below traditional retailers.

Risks to the Investment Thesis

Investing in Ross Stores is not without risks, particularly in the current environment. The most prominent risk is the impact of elevated and potentially increasing tariffs on goods imported from China. As a significant portion of merchandise originates from China, tariff increases can directly raise costs, pressure merchandise margins, and potentially necessitate price increases that could affect consumer demand, particularly among value-sensitive customers. The unpredictable nature of trade policy adds a layer of uncertainty to financial forecasting.

Macroeconomic pressures, including prolonged inflation and high costs for necessities, continue to strain the discretionary spending power of Ross's core low to moderate-income customer base. This could lead to weaker-than-expected comparable store sales. Competitive pressures from other off-price retailers and broader retail trends, including the growth of e-commerce (where Ross has a less developed presence compared to some rivals), also pose ongoing challenges. Operational risks include potential disruptions in the supply chain, challenges in managing inventory levels and markdowns effectively, and issues related to shrink (retail theft), which continues to be a difficult environment. The ability to consistently find attractive, branded merchandise at desirable discounts is fundamental to the business model and relies on vendor relationships and market conditions.

Conclusion

Ross Stores stands as a resilient player in the retail sector, underpinned by its proven off-price model and unwavering commitment to value. While the first quarter of fiscal 2025 demonstrated operational stability and sequential improvement in sales trends, the withdrawal of full-year guidance underscores the significant external headwinds, most notably the impact of tariffs on goods originating from China. This tariff pressure is expected to weigh on profitability in the near term, testing the company's ability to mitigate costs while maintaining its crucial value proposition.

Despite these challenges, the core investment thesis remains centered on Ross's ability to execute its disciplined store growth strategy, leverage its flexible buying model to capitalize on opportunistic inventory buys (potentially amplified by broader retail disruptions), and drive efficiencies through ongoing investments in its supply chain and technology. The company's strong balance sheet provides a buffer against uncertainty and supports continued capital return to shareholders. While the path forward is subject to macroeconomic volatility and trade policy shifts, Ross's seasoned leadership, operational strengths, and strategic focus on delivering branded value position it to navigate the current environment and potentially emerge stronger, continuing its long-term growth trajectory in the value-focused retail landscape.
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