10-Q: Ross Stores Reports Modest Q1 Sales Growth Amid Macroeconomic Headwinds, Plans Continued Store Expansion

Ross Stores, Inc. reported a 2.6% increase in sales to $4.985 billion for the first quarter of fiscal 2025, with diluted earnings per share rising slightly to $1.47, while navigating persistent inflation and tariff pressures.

Summary

• Sales for the three months ended May 3, 2025, increased by $126.9 million, or 2.6%, to $4.985 billion, compared to $4.858 billion in the prior year period.
• Comparable store sales growth was 1% for Q1 fiscal 2025, a slowdown from 3% in the same period last year.
• Net earnings for the quarter decreased slightly to $479.2 million, down from $488.0 million in the prior year.
• Diluted earnings per share (EPS) increased by $0.01 to $1.47, primarily due to a 2% reduction in weighted-average diluted shares outstanding from stock repurchases.
• Operating income remained flat at 12.2% of sales for both periods.
• Cost of goods sold as a percentage of sales was relatively flat at 71.8%, with a 45 basis point decrease in merchandise margin due to higher ocean freight costs and initial tariff impacts, partially offset by lower buying costs and domestic freight leverage.
• Selling, general and administrative (SG&A) expenses were relatively flat at 16.0% of sales, with lower incentive compensation expense offset by sales deleverage.
• The effective tax rate increased to approximately 25% from 23% in the prior year, mainly due to tax effects associated with stock-based compensation.
• The company opened 19 new stores (16 Ross, 3 dds DISCOUNTS) in Q1 fiscal 2025, bringing the total store count to 2,205.
• Net cash provided by operating activities increased to $409.7 million from $368.9 million, driven by lower incentive compensation payments.
• Net cash used in investing activities increased to $207.4 million from $136.2 million, primarily due to higher capital expenditures for a new distribution center in Randleman, North Carolina, and new store openings.
• Net cash used in financing activities significantly increased to $1.15 billion from $450.0 million, mainly due to the repayment of $700 million in Senior Notes and ongoing stock repurchases.

Sentiment

Score: 6

Explanation: The sentiment is moderately positive. While sales growth and net earnings showed some deceleration and slight decline respectively, the company's strategic store expansion, strong liquidity, and effective share repurchase program are positives. Management's forward-looking statements acknowledge ongoing macroeconomic pressures and expected margin compression due to tariffs and distribution costs, indicating a realistic and managed outlook rather than a significant negative surprise. The EPS increase due to buybacks also supports a neutral-to-slightly-positive view despite operational headwinds.

Positives

• Diluted earnings per share increased by $0.01 to $1.47, driven by effective share repurchases.
• The company continues its strategic store expansion, opening 19 new stores in Q1 fiscal 2025 and planning approximately 90 new stores for the full fiscal year.
• Net cash provided by operating activities improved to $409.7 million, indicating strong operational cash generation.
• The company maintains a strong liquidity position with $3.8 billion in unrestricted cash and a $1.3 billion available revolving credit facility, indicating sufficient funds for operations, capital investments, and shareholder returns.
• Management emphasizes a flexible off-price business model, which they believe positions them well to gain market share and mitigate tariff impacts.

Negatives

• Sales growth slowed to 2.6% in Q1 fiscal 2025, compared to 8% in the prior year period.
• Comparable store sales growth decelerated to 1% in Q1 fiscal 2025, down from 3% in the previous year.
• Net earnings slightly decreased to $479.2 million from $488.0 million year-over-year.
• Merchandise margin decreased by 45 basis points due to higher ocean freight costs and the initial impact of tariffs.
• Interest income, net, decreased by $11.5 million, primarily due to lower average interest rates and reduced cash balances following debt repayments.
• The effective tax rate increased to 25% from 23%, mainly due to tax effects associated with stock-based compensation.

Risks

• Changes in U.S. tax, tariff, or trade policy, particularly concerning goods from China (which accounts for over half of merchandise sold), could significantly increase costs and pressure margins.
• Uncertainties from the macroeconomic environment, including prolonged inflation, high interest rates, housing, energy, and fuel costs, and geopolitical conditions, may negatively impact consumer confidence and discretionary spending.
• Unexpected shifts in consumer spending or preferences for apparel and home-related merchandise could adversely affect sales.
• Intense competitive pressures within the off-price retail industry pose a continuous challenge.
• The need to effectively manage inventories, markdowns, and prevent inventory shortage is crucial for achieving planned gross margins.
• Risks associated with importing merchandise, such as supply chain disruptions, shipping delays, and higher ocean freight costs, could impact product availability and profitability.
• Unseasonable weather or extreme temperatures may alter shopping patterns and consumer demand for seasonal products.
• Dependence on the market availability and quality of attractive brand name merchandise at desirable discounts, and the ability of buyers to anticipate consumer preferences.
• Information or data security breaches, including cyber-attacks on transaction processing and computer systems, could disrupt operations and lead to theft of confidential information.
• Disruptions in the supply chain or information systems, including from ransomware, could hinder sales processing and timely product delivery.
• Challenges in securing acceptable new store sites with favorable consumer demographics to meet planned expansion goals.
• Potential adverse outcomes from legal, regulatory, or tax matters, or new tax legislation, could increase operational costs.
• Damage to the company's corporate reputation or brands could negatively affect sales and operating results.
• The ability to continually attract, train, and retain skilled retail associates is vital for executing off-price strategies.
• Possible volatility in revenues and earnings due to various external factors.
• Public health or safety crises, or natural/man-made disasters in key operational areas (e.g., California, distribution centers), could harm the business.

Future Outlook

Ross Stores expects to open approximately 90 new stores in fiscal 2025, including 31 stores in the second quarter. The company anticipates merchandise margin to decrease as a percentage of sales in Q2 fiscal 2025 due to announced tariffs and increased distribution costs from the opening of its eighth distribution center in Buckeye, Arizona. These cost increases are expected to be partially offset by lower incentive compensation expense. Overall, operating income is projected to decrease as a percentage of sales in the second quarter compared to the prior year. The company plans capital expenditures of approximately $855 million for fiscal 2025, focusing on new and existing stores, supply chain investments, and IT systems, funded by existing cash and operations.

Management Comments

• "We remain focused on maintaining a pricing umbrella below traditional retailers in order to continue delivering high quality, branded merchandise at great values to our customers."
• "Through these ongoing pressures and uncertainty, we continue to remain focused on offering our customers a wide assortment of quality branded bargains."
• "We will continue to make necessary adjustments with our flexible off-price business model to navigate through this uncertain environment and believe we are well-positioned to gain market share while minimizing the impact from tariffs."
• "Despite prolonged inflation, deteriorating consumer sentiment, and fluctuating tariff levels, we believe that our merchandising and operational strategies enable us to deliver the values our customers have come to expect from us."
• "Moving into the second quarter of fiscal 2025, we expect merchandise margin to decrease as a percentage of sales due to the impact from announced tariffs and distribution costs to increase as a percentage of sales primarily due to the opening of our eighth distribution center in Buckeye, Arizona in May 2025. We expect these costs to be partially offset by lower incentive compensation expense."
• "We estimate that existing cash and cash equivalent balances, cash flows from operations, our bank credit facility, and trade credit are adequate to meet our operating cash needs and to fund our common stock repurchases, planned capital investments, debt repayments, quarterly dividend payments, and interest payments, for at least the next 12 months."

Industry Context

Ross Stores operates in the highly competitive off-price retail sector, which is generally more resilient during periods of economic uncertainty as consumers seek value. The company's focus on offering branded merchandise at significant discounts positions it favorably against traditional retailers. However, the broader retail industry faces challenges from prolonged inflation, impacting consumer discretionary spending, and unpredictable trade policies, particularly tariffs on goods from China, which could affect sourcing costs and profitability across the sector.

Management Changes

Legal Proceedings

• The company is named in class/representative action lawsuits, primarily in California, alleging violations of wage and hour laws.
• The company is party to various other legal and regulatory proceedings arising in the normal course of business, including commercial, product and product safety, consumer, intellectual property, environmental, and labor and employment-related claims.
• Management believes the resolution of currently pending litigation will not have a material adverse effect on the company's financial condition, results of operations, or cash flows.

Stakeholder Impact

• Shareholders: Impacted by dividend payments, stock repurchases, and diluted EPS growth. Potential for future share price volatility due to macroeconomic factors and tariff impacts.
• Employees: Subject to wage and hour laws, with pending class action lawsuits. Stock-based compensation and employee stock purchase plans are in place.
• Customers: Benefit from the company's focus on offering high-quality, branded merchandise at significant discounts, especially during inflationary periods.
• Suppliers: Participate in a voluntary supply chain finance program, with the company's responsibility limited to original payment terms. Exposed to potential changes in sourcing patterns due to tariffs.
• Creditors: Impacted by the company's debt repayments and compliance with financial covenants under its revolving credit facility.

Next Steps

• Open approximately 90 new stores in fiscal 2025, including 31 stores (28 Ross, 3 dds DISCOUNTS) in the three-month period ending August 2, 2025.
• Continue construction of the next distribution center in Randleman, North Carolina.
• Manage merchandise margin and distribution costs in Q2 fiscal 2025, anticipating decreases due to tariffs and the new Buckeye, Arizona distribution center.
• Continue to execute the $2.1 billion stock repurchase program, with $787.5 million remaining available as of May 3, 2025.
• Pay a quarterly cash dividend of $0.4050 per common share on June 30, 2025.

Key Dates

Recommendation

Keywords

Off-price retail, Apparel, Home fashions, Ross Dress for Less, dds DISCOUNTS, SEC filing, Quarterly report, Financial results, Sales growth, Earnings per share, Operating income, Inventory management, Store expansion, Capital expenditures, Stock repurchase, Dividends, Macroeconomic risks, Tariffs, Inflation, Supply chain, Retail industry