Ross Stores (ROST, Financial) delivered an impressive Q2 performance, surpassing both top and bottom lines, growing same-store sales beyond its forecast, and raising its FY25 (Jan) EPS outlook. Peer TJX (TJX, Financial) also showcased strong demand in off-price retail with its positive JulQ results earlier this week. This performance pushed ROST to new record highs before a mild retreat. With ROST highlighting sustained value-seeking behavior amid economic headwinds, investors are quickly piling back into the stock, sending it to fresh all-time highs today. Similarly, peer Burlington Stores (BURL, Financial), which reports JulQ results next week, is also reaching new highs today.
- ROST continued its solid earnings streak in Q2, delivering EPS of $1.59 on revenue of $5.29 billion, a 7.1% year-over-year improvement. Comps were a point higher than ROST's best-case scenario outlined last quarter, delivering +4% in Q2. Geographically, strength was broad-based, with cosmetics and children's categories leading the charge.
- Merchandise margins compressed slightly, edging 80 bps lower year-over-year, consistent with management's remarks that this metric would endure pressure throughout FY25. This is due to an increase in branded merchandise to cater to higher-income shoppers during the inflationary environment. However, ROST improved its profitability, boasting a 115 bp jump in operating margins year-over-year to 12.5%, benefiting from better-than-expected top-line growth and lower distribution costs.
- Despite sound Q2 numbers, the spending climate remains challenging. ROST noted that its low-to-moderate income customers continued to face high costs for necessities, squeezing their discretionary spending. This, combined with less favorable year-over-year results in the back half of FY25, led to unchanged comp guidance. ROST expects comps to be +2-3% in Q3 (Oct) and Q4 (Jan), up from +5% and +7% in the year-ago periods, respectively.
- ROST anticipates achieving additional efficiencies over the next two quarters, offsetting the pressure from lower merchandise margins. As a result, it raised its FY25 EPS outlook to $6.00-6.13 from $5.79-5.98, which was previously raised from $5.64-5.89 last quarter.
ROST's impressive Q2 performance highlights the attractiveness of the off-price retail space. Like Walmart (WMT, Financial) mentioned last week, customers of all incomes are hunting for value. As long as this trend continues, ROST is well-positioned to benefit. Even if disinflation accelerates and incomes rise, ROST's moves to retain gains and cater to higher-income shoppers keep it on solid ground for growth.
In summary, while the economic environment may be challenging, ROST is maximizing its benefits by bringing more branded merchandise to its stores to retain higher-income shoppers while maintaining value offerings for lower-income customers.
