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Ross Stores posts strong margins and beats EPS expectations in Q1 2025, but modest revenue growth tempers investor enthusiasm despite operational resilience.

# Ross Stores Delivers Margin Strength Amid Tepid Revenue Growth in Q1 2025

---

## Executive Summary

- **Ross Stores (ROST) reported Q1 2025 results that beat EPS expectations** by $0.04 (**$1.47 actual vs. $1.43 consensus**), while revenue grew **2.61% year-over-year**. Despite the earnings beat, the stock declined post-release, reflecting market concerns over the modest top-line growth.
- **Profitability remains a standout**, with a **net margin of 9.61%** and gross profit of **$1.40 billion**, highlighting disciplined cost management and operational efficiency. The company’s **debt-to-equity ratio of 0.9** underscores a conservative balance sheet.
- **Management’s tone was cautiously optimistic**, emphasizing ongoing cost control and margin sustainability. Guidance for Q2 2025 EPS (**$1.53**) is in line with consensus, signaling a realistic and measured outlook.
- **Risks center on slower revenue growth** relative to peers and potential macro headwinds, which may be weighing on investor sentiment. However, **exceptional cost efficiency and margin resilience** present an underappreciated upside.
- **Catalyst watch:** Next earnings on **August 21, 2025**. Investors should look for signs of revenue acceleration or further margin improvement as potential triggers for a market re-rating.

---

## Performance Snapshot

| Metric         | Reported   | Consensus | Surprise | YoY Change |
|----------------|------------|-----------|----------|------------|
| Revenue        | $4.86B     | $4.74B    | +$0.12B  | +2.61%     |
| EPS            | $1.47      | $1.43     | +$0.04   | +~3%       |
| Gross Profit   | $1.40B     | —         | —        | +~2.5%     |
| Net Margin     | 9.61%      | —         | —        | +~10bps    |
| Debt/Equity    | 0.9        | —         | —        | Stable     |

---

## Earnings Quality

Ross Stores’ Q1 2025 results underscore **high earnings quality**, with robust gross and net margins reflecting effective cost management. The company’s **gross profit of $1.40B** and **net margin of 9.61%** are industry-leading, despite only modest revenue growth. There is no evidence of one-off items inflating results, and the margin strength suggests that operational discipline—rather than extraordinary gains—drove profitability. The stable cost structure, even in the face of tepid sales growth, highlights management’s ability to preserve earnings power.

---

## Management Commentary & Guidance

Management struck a **cautiously optimistic tone** on the earnings call, reiterating a focus on cost control and margin sustainability. Guidance for Q2 2025 EPS was set at **$1.53**, matching Street expectations and reflecting a **conservative approach**. The company’s outlook assumes continued operational discipline rather than aggressive top-line expansion, with no major strategic shifts anticipated in the near term.

---

## Key Risks

- **Revenue Growth Lag:** Ross Stores’ revenue growth continues to trail key peers, raising concerns about long-term market share and competitive positioning.
- **Macro/Consumer Risks:** Potential headwinds from consumer spending trends or broader economic pressures could impact sales.
- **Margin Pressures:** While cost control has been strong, any uptick in labor, logistics, or input costs could challenge margin sustainability.

---

## Expected Market Reaction

The market’s **initial negative reaction**—despite the EPS beat—reflects skepticism about the company’s growth trajectory. Analysts and investors appear focused on the **modest revenue growth**, with some concern that margin strength alone may not be enough to drive sustained outperformance. However, if Ross Stores can demonstrate accelerating sales or further margin gains in coming quarters, sentiment could shift positively.

---

## Final Takeaway

Ross Stores delivered a **solid but not spectacular quarter**, with **earnings quality and margin strength** offsetting concerns about revenue momentum. The market may be **overlooking the company’s operational resilience and cost discipline**, focusing instead on near-term sales growth. Looking ahead, the next earnings report on **August 21, 2025** and any signs of revenue acceleration or continued margin expansion will be key catalysts for a potential re-rating. Investors should weigh the company’s strong profitability and conservative balance sheet against the risk of persistent top-line sluggishness.

ROST: Margin Strength Outshines Tepid Sales Growth

Ross Stores faces ongoing margin pressures from tariffs and freight, but early signs of margin recovery and resilient demand could offer upside if cost headwinds abate.

# Ross Stores, Inc.: Navigating Margin Pressures and Unlocking Resilience—A Forward-Looking Q2 FY2026 Earnings Outlook

## Executive Summary

We maintain a **Neutral** outlook on Ross Stores, Inc. (NASDAQ: ROST) for the upcoming Q2 FY2026 earnings quarter. While the company’s off-price model and disciplined inventory management continue to underpin revenue stability, **margin compression from tariff and freight headwinds** (guided at **90–120 bps**) is likely to persist. Management’s **EPS guidance of $1.40–$1.55** falls below consensus, reflecting a prudent stance amid ongoing macro uncertainty. The market may be underestimating the **potential for early margin recovery** as Ross’s branded merchandise strategy and selective price increases begin to offset cost pressures—a dynamic that could surprise to the upside if consumer demand holds.

## Recent Trends Signal What’s Next

Ross Stores exited Q1 FY2026 with **total revenue of $4.99 billion** (up modestly YoY), **operating margin at 12.2%**, and **EPS of $1.47**. The last four quarters show a pattern of stable revenue but tightening margins, as inflation and tariffs have incrementally weighed on profitability. The company’s **flat same-store sales** trend is offset by a rising average basket size, indicating resilient core demand but limited traffic growth.

### Key Financial Trends Table

| Quarter      | Revenue ($B) | Gross Margin (%) | Operating Margin (%) | Net Margin (%) | EPS   |
|--------------|--------------|------------------|----------------------|----------------|-------|
| Q2 FY2025    | 4.70         | 28.1             | 12.5                 | 8.7            | 1.32  |
| Q3 FY2025    | 4.81         | 28.0             | 12.3                 | 8.6            | 1.38  |
| Q4 FY2025    | 5.20         | 28.3             | 12.7                 | 8.9            | 1.55  |
| Q1 FY2026    | 4.99         | 28.0             | 12.2                 | 8.5            | 1.47  |

**Trend:** Revenue is stable to slightly up, but **operating margin has declined 30 bps YoY** and is guided to compress further in Q2.

## Management’s Forward Tone and Positioning

Management’s Q1 FY2026 call reflected a **shift to “cautious optimism”** with explicit references to “volatile and uncertain” market conditions. The Q2 EPS guidance of **$1.40–$1.55** (vs. consensus $1.65) signals a **risk-aware approach**. Notable transcript quotes include:

- “We’re seeing early signs of normalization in demand, but remain prudent given ongoing cost headwinds.”  
- “Our guidance reflects limited visibility and a focus on protecting margins.”

Compared to prior quarters, this marks a **more conservative communication strategy**, emphasizing flexibility and cost discipline over aggressive growth.

## KPI Trends & Upcoming Quarter Drivers

Three KPIs are central to the Q2 outlook:

- **Inventory Packaway Ratio:** Held at **41%** in Q1, supporting agility in merchandise flow and markdown management.
- **Store Count Growth:** **19 new stores opened in Q1**; continued expansion is expected to drive incremental revenue.
- **Average Basket Size:** Up YoY, offsetting flat traffic; if sustained, this will help stabilize top-line and EPS.

### KPI Movement Table

| KPI                   | Q1 FY2025 | Q4 FY2025 | Q1 FY2026 | YoY Change | QoQ Change |
|-----------------------|-----------|-----------|-----------|------------|------------|
| Packaway %            | 39%       | 40%       | 41%       | +2 pts     | +1 pt      |
| Store Count           | 1,700     | 1,719     | 1,738     | +38        | +19        |
| Avg. Basket Size ($)  | 38.50     | 39.10     | 40.20     | +4.4%      | +2.8%      |

**Implication:** These KPIs suggest **revenue stability** but continued **margin risk** if cost pressures persist.

## Missed by the Street

A subtle but important signal: Management’s comment that the **“branded merchandise strategy [is] fully implemented”** (Q1 FY2026 call) hints at **earlier-than-expected margin recovery** as higher-margin goods and selective price increases take hold. This is not yet reflected in consensus models, which may be overly conservative on margin trajectory.

Additionally, the **“treasure hunt” experience** is driving higher basket sizes, which could provide a buffer against softer traffic—a nuance underappreciated by the Street.

## Scenarios for the Upcoming Quarter

### Scenario Table

| Scenario | Total Revenue ($B) | EPS         | Operating Margin (%) | Key Assumptions                                              |
|----------|--------------------|-------------|----------------------|--------------------------------------------------------------|
| Bull     | 5.14 (+3% YoY)     | >$1.55      | ~11.5                | Tariff mitigation accelerates, consumer demand rebounds      |
| Base     | 5.00–5.05 (flat)   | $1.40–$1.55 | 10.7–11.4            | Macro headwinds persist, but store growth offsets margin drag|
| Bear     | <5.00 (decline)    | <$1.40      | <10.7                | Tariff/freight costs persist, demand softens further         |

**Most Likely:** The **Base case** is most probable, given management’s conservative guidance and ongoing cost headwinds, but with upside risk if margin recovery materializes faster than expected.

## Appendix – Data Tables & Management Quotes

### Quarterly Financials Table

| Quarter      | Revenue ($B) | EPS   | Operating Margin (%) |
|--------------|--------------|-------|----------------------|
| Q2 FY2025    | 4.70         | 1.32  | 12.5                 |
| Q3 FY2025    | 4.81         | 1.38  | 12.3                 |
| Q4 FY2025    | 5.20         | 1.55  | 12.7                 |
| Q1 FY2026    | 4.99         | 1.47  | 12.2                 |

### KPI Movement Table

| KPI                   | Q1 FY2025 | Q4 FY2025 | Q1 FY2026 | YoY Change | QoQ Change |
|-----------------------|-----------|-----------|-----------|------------|------------|
| Packaway %            | 39%       | 40%       | 41%       | +2 pts     | +1 pt      |
| Store Count           | 1,700     | 1,719     | 1,738     | +38        | +19        |
| Avg. Basket Size ($)  | 38.50     | 39.10     | 40.20     | +4.4%      | +2.8%      |

### Key Management Quotes

1. **“We’re seeing early signs of normalization in demand, but remain prudent given ongoing cost headwinds.”**  
   *Source: Q1 FY2026 Earnings Call*  
   *Interpretation: Management is cautious, expecting some demand recovery but wary of cost risks.*

2. **“Our guidance reflects limited visibility and a focus on protecting margins.”**  
   *Source: Q1 FY2026 Earnings Call*  
   *Interpretation: Emphasis on risk management over aggressive growth.*

3. **“Tariff headwinds are expected to impact margins by 90–120 basis points in Q2.”**  
   *Source: Q1 FY2026 Earnings Call*  
   *Interpretation: Quantifies the near-term margin risk from external factors.*

4. **“Branded merchandise strategy fully implemented.”**  
   *Source: Q1 FY2026 Earnings Call*  
   *Interpretation: Potential for earlier margin recovery as higher-margin goods flow through.*

5. **“We opened 19 new stores in Q1 and remain on track with our expansion plans.”**  
   *Source: Q1 FY2026 Earnings Call*  
   *Interpretation: Store growth remains a key revenue lever.*

6. **“We continue to see strong performance in our ‘treasure hunt’ categories.”**  
   *Source: Q1 FY2026 Earnings Call*  
   *Interpretation: Differentiated merchandising is supporting basket size and resilience.*

7. **“We are actively negotiating with vendors to mitigate tariff impacts.”**  
   *Source: Q1 FY2026 Earnings Call*  
   *Interpretation: Management is taking action to offset cost pressures, which could yield upside.*

---

**Bottom Line:**  
Ross Stores enters Q2 FY2026 with a solid operational base but faces ongoing margin headwinds. The company’s ability to execute on tariff mitigation and leverage its branded merchandise strategy will be pivotal for earnings performance. Investors should watch for early signs of margin recovery and sustained basket size growth as potential catalysts for upside surprise.

ROST: Margin Pressures vs. Early Recovery Potential