Ross Stores Inc 2027 Q2 Earnings Call

Thank you, Diego, and good afternoon, everyone. Joining me on our call today are Michael Hartshorn, Group President and Chief Operating Officer, Bill Sheehan, Executive Vice President and Chief Financial Officer, and Connie Kao, Senior Vice President, Investor Relations. Before discussing our results, I want to recognize the outstanding team across the company and throughout the country. The robust sales and earnings growth in the quarter are a direct reflection of your hard work and commitment to the Ross organization. Thank you. Now turning to our results. We are extremely pleased with the 10% comparable store sales growth we delivered in the second quarter, marking the second quarter in a row with double-digit comp growth. Sales were strong in May and improved sequentially each month, with July delivering our strongest performance despite cycling a strong back-to-school performance last year.

Customer traffic once again served as a primary driver of our comparable store sales increase, which underscores the durability of our growth and the momentum we are building. We believe the increased traffic reflects the effectiveness of our customer acquisition efforts. During the quarter, we saw gains from new and lapsed customers, along with more frequent trips and higher spending from existing customers, reflecting deeper engagement with both of our chains. Importantly, the new customers we are attracting span a broad range of income demographics and age cohorts, including younger shoppers, which we believe reflects the broad appeal of our brand and the success of our marketing efforts in reaching and engaging a diverse customer base. Once in our stores, both new and existing customers are responding to our compelling values and a broader selection of fashion and brands.

The merchants and planners have done a terrific job of opening new vendors and satisfying the demands of a wide variety of customers. Finally, our stores organization has done an excellent job enhancing the in-store shopping experience and managing the elevated sales volumes. We feel great about the early success of our growth and strategies and have confidence in our ability to continue to gain market share. Consistent with the trends we saw in recent quarters, the strong performance at Ross was broad-based across both merchandise categories and geographies. In the second quarter, home and cosmetics were our strongest businesses. By geography, we saw strength across all markets, with the Midwest performing the best. dd's DISCOUNTS also delivered solid sales and saw similar broad-based performance across merchandise areas and geographic regions. Turning to inventory. Consolidated inventories at quarter end increased 18%.

Packaway represented 36% of total inventory, compared with 38% last year. We are leveraging our inventory position to not only meet the demand of higher customer traffic in our stores, but also to broaden our merchandise offerings on the selling floor across our store base. These efforts are leading to higher sales and improved merchandise margins while maintaining fast inventory turns. We are pleased with both the level and composition of our inventory and continue to have plenty of flexibility to capitalize on closeout opportunities as we enter the fall season. Turning to store growth. We are now planning to open 115 locations in 2026, up from 110 in our prior guidance. We are particularly encouraged by the strength of our recent openings in both existing and newer markets, giving us added confidence in our ability to continue to grow our store base over time.

Our plans also contemplate approximately 5 to 10 store relocations and closures. Overall, we remain confident that the actions we are taking across merchandising, marketing, and stores are enhancing the customer experience and driving strong performance. While the results to date are encouraging, we believe we are only beginning to realize the full potential of many of our initiatives. Our sustained sales performance reinforces our confidence that our more growth-oriented approach is resonating with customers. The team is energized by the opportunities ahead, and we see significant runway to build on the current momentum and drive continued sales gains over time. Now Bill will provide further details on our second quarter results and additional color on our outlook for the remainder of the year.

Thank you, Jim. Building on our success from the first quarter, we reported very strong sales and earnings results for the second quarter. Total sales for the period grew 13% to $6.3 billion, with comparable store sales increasing 10%. As Jim mentioned earlier, the double-digit comp growth was primarily driven by an increase in the number of transactions. Gross margin improved by 625 basis points, driven primarily by 405 basis points of tariff refunds. Merchandise margin increased by 110 basis points while distribution costs were lower by 100 basis points, given favorable timing of packaway related expenses, higher productivity, and as we anniversaried last year's tariff-related processing costs. In addition, occupancy costs leveraged by 25 basis points. Partially offsetting these benefits were buying costs, which deleveraged by 5 basis points from higher incentives and an increase in freight costs of 10 basis points due to higher fuel prices.

SG&A for the period deleveraged by 15 basis points due to higher incentives given the earnings outperformance. Second quarter operating margin increased 610 basis points, which included the aforementioned 405 basis points from tariff refunds. Excluding this benefit, operating margin increased 205 basis points compared to the prior year. Second quarter net income was $851 million compared to $508 million last year, and earnings per share were $2.66 compared to $1.56 in the prior year period. Sales for the first six months of 2026 grew 17% to $12.3 billion, up from $10.5 billion in the prior year. Comparable store sales for the first half of 2026 were up 13% and earnings per share were $4.69 compared to $3.03 for the first half of 2025.

As a reminder, both the second quarter and first six months results in 2026 include $253 million, or approximately $0.60 in earnings per share of tariff refunds. Now to our shareholder return activity. As noted in today's release, we repurchased approximately 1.4 million shares during the quarter for an aggregate total cost of $319 million under the two-year, $2.55 billion authorization approved by our board of directors in March of this year. We remain on track to buy back a total of $1.275 billion in stock during 2026. Now let's discuss our outlook for the remainder of 2026. As noted in today's press release, we exited the quarter with building momentum, and we are excited about the plans we have in place as we enter the fall season.

Despite facing significantly more challenging year-over-year comparisons in the back half of the year, we are raising our outlook for both the third and fourth quarters. Comparable store sales are now forecasted to increase 6%-7% in the third quarter, with earnings per share expected to be in the range of $1.75-$1.83, versus $1.58 last year. Our guidance assumptions for the third quarter of 2026 reflect: total sales are forecast to increase 9%-11% versus the prior year. If same store sales perform in line with our forecast, operating margin for the third quarter is planned to be in the range of 11.7%-12.0%, compared to 11.6% last year. Our forecast reflects leverage from the expected comp store sales increase, as well as slightly higher merchandise margins. Partially offsetting these benefits are higher freight costs, given the increase in fuel prices.

As mentioned earlier, we raised our new store opening plans for the year and now expect to open 51 stores during the third quarter, including 41 Ross and 10 dd's DISCOUNTS locations. Net interest income is estimated to be approximately $30 million. The tax rate is projected to be about 25%, and diluted shares outstanding are expected to be approximately 319 million. Moving to the fourth quarter. Comparable store sales are now expected to increase 4%-5% on top of a robust 9% increase last year. Earnings per share are planned to be in the range of $2.17-$2.26, compared to $2 for the same period in 2025. If the second half of 2026 performs in line with these projections, earnings per share for the full year are now forecast to be in the range of $8.61-$8.77, versus $6.61 last year.

Included in this year's forecast is approximately $0.60 of earnings per share from tariff refunds. Now I'll turn the call back to Jim for closing comments.

Thank you, Bill. We delivered robust first half results and remain encouraged by the positive trends we are seeing across the business. While we are pleased with the progress we have made over the last several quarters, we remain focused on building on that momentum. The work underway across the organization is centered on continuing to strengthen our brand relevance, delivering world-class merchandise assortments, and further improving the in-store experience. We believe we have only begun to tap into the full growth potential of the business. At this point, we would like to open the call and respond to any questions that you may have.