Ross Stores - Earnings Call - Q3 2026

Transcript

Operator (participant)

Good afternoon and welcome to the Ross Stores Third Quarter 2025 Earnings Release Conference Call. The call will begin with prepared comments by management followed by a question-and-answer session. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call will contain forward-looking statements regarding expectations about future growth and financial results, including sales and earnings forecasts, new store openings, and other matters that are based on the company's current forecast of aspects of its future business. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from historical performance or current expectations.

Risk factors are included in today's press release and the company's Fiscal 2024 Form 10-K and Fiscal 2025 Form 10-Qs and 8-Ks on file with the SEC. I would like to turn the call over to Jim Conroy, Chief Executive Officer.

Jim Conroy (CEO)

Good afternoon. 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. As noted in today's press release, we are very pleased with our third quarter sales results, which accelerated from the prior quarter. Total sales for the period grew 10% to $5.6 billion, with comparable store sales increasing a strong 7%. Our merchants delivered a compelling assortment of brand-name values, which led to broad-based growth across all major merchandise categories. Those assortments, coupled with our new marketing campaigns, drove excitement, higher customer engagement, and increased store traffic. We had an excellent back-to-school selling season, with strong trends that continued through the balance of the quarter. Additionally, the stores and supply chain organizations executed extremely well to support the elevated sales and inventory flow.

The strength in top line, coupled with our continued focus on expense control, resulted in an operating margin of 11.6% that was much stronger than expected. Earnings per share for the 13 weeks ending November 1st, 2025, were $1.58 on net income of $512 million. Included in this year's third quarter earnings is an approximate $0.05 per share negative impact from tariff-related costs. These results compared to $1.48 per share on net earnings of $489 million in the prior year period. For the first nine months, earnings per share were $4.61 on net earnings of $1.5 billion, compared to $4.53 per share on net income of $1.5 billion for the same period last year. Included in year-to-date 2025 earnings are an approximate $0.16 per share negative impact from tariff-related costs. Sales for the year-to-date period grew to $16.1 billion, with comparable store sales up 3% over last year.

For the third quarter at Ross, cosmetics, shoes, and ladies were the strongest merchandise areas. By geography, we saw broad-based strength, with the Southeast and the Midwest performing the best. dd's DISCOUNTS' strong value and fashion offerings continued to resonate with its shoppers and delivered comp gains relatively similar to Ross for the period. At quarter end, total consolidated inventories were up 9% versus last year, and average store inventories were up 15% as we advanced the inventory build for the holiday season into the tail end of October. Packaway merchandise represented 36% of total inventories, compared to 38% last year. We feel very good about the health and levels of our inventory and are well-positioned to deliver a broad assortment of values this holiday selling season. During the third quarter, we opened 36 new Ross and four dd's DISCOUNTS stores.

Similar to our summer opening group, we are pleased with the performance of our fall openings, particularly the results in the new markets, including the New York Metro area. The openings in the third quarter completed our expansion program for 2025. For the year, we added a total of 90 locations comprised of 80 Ross and 10 dd's. We plan to close and/or relocate 10 locations in the fourth quarter and expect to end the year with 1,903 Ross stores and 360 dd's locations. At this point, I would like to provide an update on our branded strategy, which has now been fully embedded in our merchandising approach for more than a year. Over this period of time, the merchants have been laser-focused on delivering high-quality, branded bargains at compelling values.

They have been able to deliver an assortment that spans good, better, and best brands to ensure that we are providing exceptional values to our diverse customer base. We would attribute a portion of the sequential improvement in the business to the successful implementation of the branded strategy. This strategy has particularly helped the ladies' business, which further accelerated this quarter and comped above the chain average. Additionally, the increased emphasis on brands has further strengthened our vendor partnerships and increased closeout opportunities. These efforts not only drove higher sales but also helped us partially offset tariff impacts, resulting in better-than-expected merchandise margins for the third quarter. While tariff uncertainties persist, we are encouraged by the exceptional product availability in the marketplace. This has enabled us to secure opportunistic buys that position us favorably for the holiday season.

As a result, we now expect tariff-related costs in the fourth quarter to be negligible. From a pricing perspective, it is clear the consumer is prioritizing value, and our updated assortment is driving stronger customer engagement. While pricing has increased across the retail environment, our commitment to delivering value remains unchanged. We will continue to maintain a strong value proposition relative to traditional retailers while working to mitigate the impact on our merchandise margin. Bill will now provide further details on our third quarter results and fourth quarter guidance.

Bill Sheehan (EVP and CFO)

Thank you, Jim. As previously stated, comparable store sales rose 7% in the quarter. The gain was a result of both higher transactions and a larger average basket size. Operating margin decreased by 35 basis points to 11.6%, mainly due to the impact of tariffs. Cost of goods sold increased by 35 basis points in the quarter. Distribution costs were higher by 60 basis points, primarily due to the opening of a new distribution center earlier this year and tariff-related processing costs. Merchandise margin deleveraged by 10 basis points, while buying expenses were flat compared to the prior year. Partially offsetting the higher costs in the quarter were lower domestic freight and occupancy costs of 25 and 10 basis points, respectively. SG&A costs were flat year over year, despite the headwinds from CEO transition costs.

During the quarter, we repurchased 1.7 million shares of Common Stock for an aggregate cost of $262 million. We remain on track to buy back a total of $1.05 billion in shares this year. Now let's discuss our fourth quarter guidance. We're encouraged by our business momentum as we enter the critical holiday season. As a result, for the 13 weeks ending January 31, 2026, we are raising our comparable store sales forecast to be up 3%-4%, with earnings per share in the range of $1.77-$1.85. This updated guidance range reflects approximately $0.03 earnings per share of unfavorable timing of packaway-related expenses that benefited the third quarter. Based on our year-to-date results and updated fourth quarter forecast, we are increasing our earnings per share guidance for fiscal 2025 to be in the range of $6.38-$6.46.

As for tariffs, we now forecast the fourth quarter impact to be negligible, leading to a full year cost of approximately $0.15 per share. These estimates are based on the current level of tariffs. In addition, and as a reminder, 2024 fourth quarter and full year earnings per share of $1.79 and $6.32, respectively, included a benefit of approximately $0.14 in earnings per share related to the sale of a packaway facility. The operating statement assumptions that support our fourth quarter guidance include the following: Total sales are projected to increase 6%-8%. We expect operating margin to be in the range of 11.5%-11.8%, compared to 12.4% last year. The year-over-year change primarily reflects last year's benefit from the sale of a packaway facility that was worth about 105 basis points. Net interest income is estimated to be about $30 million.

Our tax rate is expected to be approximately 24%, and weighted average diluted shares outstanding are projected to be about 322 million. Now I'll turn the call back to Jim for closing comments.

Jim Conroy (CEO)

Thank you, Bill. To sum up, we are pleased with our third quarter results and encouraged by our sales momentum. With a strong merchandising plan and a terrific product assortment in place, we are optimistic about our prospects for the fourth quarter. Additionally, the store and supply chain teams are well-positioned for the holiday season, and our marketing campaigns have continued to build excitement. We believe that this multifaceted approach will help us continue our positive momentum and enable us to capture additional market share. Finally, I would like to thank the entire organization for their hard work and solid execution, which enabled us to deliver a strong third quarter performance. Despite the ongoing challenges and uncertainty in the macro environment, we remained focused on our core strategies and executed well as a cohesive team across the entire company.

At this point, we would like to open the call and respond to any questions you might have. John?

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the queue. You may press star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you please limit yourself to one question and one follow-up. Thank you. One moment, please, while we pull for questions. The first question comes from the line of Matthew Boss with JPMorgan. Please proceed with your question.

Matthew Boss (Equity Research Analyst)

Thanks, and congrats on a really great print.

Jim Conroy (CEO)

Thank you, Matt.

Matthew Boss (Equity Research Analyst)

Jim, could you help break down the inflection in same-store sales or the 500 basis point sequential acceleration that you saw? How much would you attribute to company-specific initiatives as we think about marketing or the early stages of store experience relative to the macro backdrop? Could you just elaborate on the strong momentum that you cited in November that supported the fourth quarter raise?

Jim Conroy (CEO)

Sure. It was a really nice sequential improvement, and I think in the prepared remarks, we used the word broad-based. The merchandise categories, every single merchandise category in the third quarter, every single major merchandise category anyway, was positive or nicely positive. We had some businesses in the second quarter that were somewhat underperforming, and they have really caught up, and we have seen some really great improvement in most categories across the business. We also had broad-based strength across the country in terms of our geographic regions, including regions that you would otherwise think would be under pressure. Broad-based strength across the business, how much of it is internal versus external? It is hard to say. We acknowledge that there probably has been some tailwinds out there. Some people are calling out that weather may have been a help.

Last year, we called out that weather was a hindrance to our business a little bit. In terms of headwinds, there's a whole bunch of other macro uncertainties that have probably left consumers a little bit uneasy in their shopping. I'd give a lot of credit to the team. The product team leads the charge. The assortments look fantastic. They've navigated through tariffs and very strategically have maneuvered AURs. The marketing team has done a very nice job. The stores team has stepped up. Really, the whole company. I'm sure there might be something in the macro backdrop that's a tailwind to us, but I also give some credit to the team for just executing extremely well.

Operator (participant)

The next question comes from the line of Corey Tarlowe with Jefferies. Please proceed with your question.

Corey Tarlowe (SVP of Equity Research)

Great. Thanks, and good afternoon, and congrats on the strong results. Jim, I just wanted to hone in on this element of change. You have come into the business, and we were comping flat to start the year, and we have really substantially accelerated. I wanted to get a flavor for what, in your view, are the major drivers of this improvement in the momentum? What do you think is perhaps the stickiest of all of these changes that is going to propel the business on a multi-year trajectory for continued growth and improvement in outperformance?

Jim Conroy (CEO)

Sure. Happy to have a shot at that. First, I'd start with I absolutely inherited a strong company that was being managed extremely well. So the company has been growing for years before I showed up. The first quarter was a bit of an anomaly, right? We had a lot of macro headwinds that pushed the business to a flat after a challenging latter part of January and a very challenging February, which we called out last year. In terms of some of the things that have changed, it's not very different than my remarks on some of the first couple of investor calls. The merchandising team is extremely sophisticated, and some of the best merchants in the world work for Ross, and that strength continues to propel the business forward.

If I added anything to the business, it is to sort of raise or amplify the voices of the marketing group and the stores team so we can drive more traffic from a marketing standpoint, and when they get to the stores, they can enjoy a slightly better, or hopefully much better, in-store shopping environment. The overarching strategy is quite simple, which is just to get merchandising, marketing, and stores, perhaps add supply chain to that mix, operating in unison so we're all kind of pushing the business forward for more growth.

Corey Tarlowe (SVP of Equity Research)

Understood. Just as a follow-up, the new marketing campaigns have clearly resonated. What is it, in your view, that you think has materially helped to accelerate the amplification of all of these improvements that you've made in the business, particularly from a branded perspective, that's really working from a marketing standpoint and that's helping to amplify the message even more and resonate with consumers?

Jim Conroy (CEO)

Sure, sure. Coming in as an outsider, there are some disadvantages. I wasn't an off-price person, and I'm not a true merchant. Perhaps if there was one advantage, it was a set of fresh eyes. From a marketing standpoint, we absolutely want to remain rooted in great branded values, but the challenge that I gave to the marketing team and to the new agency was, how do we create cut-through with a refreshed marketing message? We have really contemporized how we go to market in terms of a creative standpoint. We have tweaked the merchandise mix a bit. Notably, we haven't increased marketing expense, at least as a percentage of sales. I think sort of this refreshed view of how you can look at the store and reach out to customers in a slightly different way and perhaps reach out to younger customers in a more aggressive way.

It seems to be taking root. We are encouraged by it. We're excited by it. We've seen some hard metrics improve, and we've seen some qualitative factors improve nicely. I certainly don't want to dampen anybody's enthusiasm because it's fantastic to see. Let's just remember that it's only been a few months now, right? We've got a very busy holiday season to get through. We'll see why it becomes sticky in your mind. Coming back to that part of your question, I think probably the stickiest thing ultimately will be the power of the Ross brand and just what that means for customers and the promise that it delivers to shoppers.

It has had a great legacy up to this point, and if I had any impact on it, it is how can we modernize it slightly so we continue to resonate with all customers, particularly younger customers.

Corey Tarlowe (SVP of Equity Research)

That's a great color. Thanks so much and best of luck.

Jim Conroy (CEO)

Thank you.

Operator (participant)

The next question comes from the line of Mark Altschwager with Baird. Please proceed with your question.

Mark Altschwager (Senior Research Analyst)

Thank you for taking my question. You're expecting tariff costs now to be negligible in Q4, which is great to hear. I was hoping you could update us on the mitigation efforts, what's working, what's giving you the comfort with your ability to fully offset, and with that, hoping you could speak specifically to the AUR trend you're seeing and also how we should interpret that Q4 guide as we think about the wraparound effects of tariffs for early 2026.

Michael Hartshorn (Group President and COO)

Hi, Mark. It's Michael Hartshorn. Similar to what happened in the second quarter, as you saw in our commentary, the tariff-related costs came in lower than we expected, and our merchant teams have done a tremendous job balancing cost concessions with modest market-driven price increases where we can maintain our value gap against other retailers. In addition, they were able to take advantage, given the closeout availability, take advantage of closeouts in the marketplace and chase above-plan sales. As we expected, as we imagined the year when we had additional lead time from the initial tariff announcements and had opened the buy to fill, our merchant teams have been able to mitigate the impact of tariffs as we progressed through the year. In addition, with some tariff stability, we've been able to normalize ticketing activities in our distribution centers.

For going forward, it's too early to speak for 2026, but barring any meaningful changes in the tariff policy, we would expect pricing stability, which would eliminate the need for merchants to make pricing decisions against a moving target.

Corey Tarlowe (SVP of Equity Research)

Thank you. A quick follow-up on the comp acceleration. I believe you said consistency or you said strength across regions, but I'm wondering if there's any call-out by demographic or income cohort.

Michael Hartshorn (Group President and COO)

Sure. Just to follow up on your question on AUR, the comp components for the quarter, traffic, UPT, and AUR all increased, and transactions were the biggest of those. In terms of demographic performance, we called out in previous quarter our Hispanic stores during the quarter at both Ross and dd's stores that have what I'd say is high trade area Hispanic population, saw an improvement that was similar to the chain from quarter to quarter and ended up posting solid comps despite trailing the chain slightly. Other call-outs we did mention in the call, Southeast and the Midwest were our top-performing markets. In terms of bigger markets, California, Florida, and Texas were all relatively in line with the chain.

Corey Tarlowe (SVP of Equity Research)

Thank you.

Michael Hartshorn (Group President and COO)

Sure.

Operator (participant)

The next question comes from the line of Chuck Grom with Gordon Haskett. Please proceed with your question.

Chuck Grom (Senior Analyst and Managing Director)

Hey, thanks, Tom. Good afternoon. Thanks. On the marketing change, can we double-click on that a little bit? Do you think you're driving new or lapsed customers? Do you think you're increasing engagement with existing customers? Where do you still see opportunity on that front?

Jim Conroy (CEO)

It's hard to tease out the components of the traffic. We do believe we're gaining some new customers and re-engaging with lapsed customers. If you go through the analytics provided by Meta Platforms and you go through TikTok, I think it's safe to say we have improved our engagement. In terms of where we are, in terms of our evolution from a marketing and branding standpoint, it's very, very early, right? We hired an agency in the beginning of the year. Their first output was in the July timeframe. We've just released a couple of new spots for holiday that then translate across all the digital platforms as well. Very early innings.

Deepa and the Marketing Team have done an unbelievable job, but there is just even more in front of us, I think, for us to continue to learn and react to that and continue to deliver some great messaging.

Chuck Grom (Senior Analyst and Managing Director)

That's great. Just as a follow-up, you noted that as a percentage of sales, you did not increase the spend. It is well known that you spend far less in dollars and as a percentage of sales relative to your largest peer. When you look ahead, do you think you need to grow that, or do you think you continue to just reinvest and redeploy those dollars?

Jim Conroy (CEO)

It's a good question. Right now, we're going to maintain our percent of sales where it is. We have a financial and operating model that I want to kind of work within. Clearly, if we can spur on more business and drive more customers and drive more sales, even at the same rate, we'll get some more marketing dollars. It's too early to say we'll invest any more in it. Right now, the amount we're spending seems to be paying dividends. Stay tuned for that, but there's no immediate plans for an increased spend there.

Chuck Grom (Senior Analyst and Managing Director)

Got it. Thank you.

Jim Conroy (CEO)

Thank you.

Operator (participant)

The next question comes from the line of Lorraine Hutchinson with Bank of America. Please proceed with your question.

Lorraine Hutchinson (Senior Research Analyst of Retailing Department Stores and Specialty Softlines)

Thank you. Good afternoon. Jim, you called out the branded strategy as a key driver of the comp acceleration. Can you talk about how this benefit has built over time and how much more opportunity you see going forward?

Jim Conroy (CEO)

Sure. Absolutely. If you want to go through the timeline, in the fourth quarter last year, we had a decent quarter, and we called out the branded strategy touches everything, but it's probably most impactful to ladies. If we just look at the ladies' business and how it's sequentially changed over the last few quarters, last year, fourth quarter was pretty strong, but ladies was a drag on the comp. In Q1 and in Q2, the ladies' business was slightly better but still flattish and a slight drag on the comp in Q1. In Q2, it started to show some improvement. It was kind of in line with the company, maybe slightly comp-enhancing. In this most recent quarter, the entire business got better, substantially better, and the ladies' business was actually comp-enhancing.

If we posted a plus seven, you can intuit that the ladies' business was better than a plus seven.

Lorraine Hutchinson (Senior Research Analyst of Retailing Department Stores and Specialty Softlines)

How much more opportunity do you see? Yeah, how much more opportunity going forward do you see in this ladies' business from the branded strategy?

Jim Conroy (CEO)

A fair amount, I think. I mean, as you know, we've been investing in that over four or five quarters. It had a drag on our merchandise margin that we thought would be an investment in the business. That investment seems to be paying off now. I think with one very solid quarter under our belt, I'd like to think that for the next three quarters until we have leap anniversary of that, we'll see some outsized growth. Of course, that team has really started to build excitement, some great leadership there. I think even after we anniversary this quarter, I think they'll find some opportunities for more comp improvement. There's not a lack of ideas for innovation in that part of the business.

Lorraine Hutchinson (Senior Research Analyst of Retailing Department Stores and Specialty Softlines)

Thank you.

Operator (participant)

The next question comes from the line of Paul Lejuez with Citibank. Please proceed with your question.

Paul Lejuez (Managing Director and Head of Consumer Discretionary Research)

Hey, thanks. Jim, sorry if I missed a bit. Did you say anything about the monthly cadence? Curious if you could share anything on that front, home versus apparel, and specifically, not just performance, home versus apparel, but AURs in each of those categories. Is there any quantification of how your customer base has changed? Within that ladies' business, can you isolate that you are getting a customer of a certain age that you did not previously have? Is there any quantification to that?

Jim Conroy (CEO)

I'll just start on a couple of those, Paul. During the quarter, we had a very strong back-to-school and held the trend throughout the quarter. Throughout, the trends were fairly consistent, and that was true for both Ross and dd's. On the AUR, I said in a previous commentary that it was driven by increases in traffic, UPT, and AUR with the traffic or transactions for us, the biggest of those. Traffic and the basket were very similar. In terms of overall category performance, we mentioned children's and men's were relatively in line with the chain. Cosmetics, shoes, and ladies were best performers. Home was slightly below the chain average. You also asked about shifts in business. The things we measure against, usually you see bigger trends over time. We certainly talked about demographics and the Hispanic customer.

In terms of household income, not only was the sales very broad-based across geographies and merchandise categories, they were also very broad-based across trade area income levels, and we did not see any significant shifts there.

Paul Lejuez (Managing Director and Head of Consumer Discretionary Research)

Thank you. Good luck.

Jim Conroy (CEO)

Thank you.

Operator (participant)

The next question comes from the line of Alex Straton with Morgan Stanley. Please proceed with your question.

Alex Straton (Equity Research Managing Director)

Thanks so much. Congrats on a great quarter. Maybe just on maybe for you, Jim, on the upgrading the store experience. I think you highlighted that as an opportunity when you first started. Did any changes there play a role in the comp acceleration? Maybe how do you gauge effectiveness of those strategies? What are your priorities on that front as you think about 4Q and into next year?

Michael Hartshorn (Group President and COO)

I can take that. We're addressing the store experience on a couple of different factors. First, we have begun refreshing. We expect to refresh all stores in the chain, which we believe will provide a more modern look and feel for the customer. This includes new perimeter signing, wayfinding signage, along with addressing cosmetic-type repairs. We're halfway through the chain there. Though it's very early, the customer feedback has been good. The other focus areas within the store, as you can imagine, are improving line lengths and throughput through the front end of the store and also improving our recovery throughout the day. We're finding places to get efficiencies within the store and then reinvest it in those focus areas. In terms of immediate impact in the quarter, I think it's very early days. If anything, we'd expect to build momentum over time.

Alex Straton (Equity Research Managing Director)

Great. Thank you. Good luck.

Jim Conroy (CEO)

Sure. Thank you.

Operator (participant)

The next question comes from the line of Brooke Roach with Goldman Sachs. Please proceed with your question.

Brooke Roach (VP of Equity Research)

Good afternoon, and thank you for taking our question. Jim, I wanted to get your thoughts on Ross's approach to value gaps into holiday and 2026 as market prices move up. How much of the AUR growth in the third quarter was driven by price actions versus mix? And are there any categories where you've taken action on pricing where you're starting to see any signs of consumer elasticity?

Jim Conroy (CEO)

Sure. Happy to take it. In terms of the first part of your question, our strategy is, I think, a pretty typical off-price strategy of keeping an umbrella under traditional retailers in terms of pricing. We tend to be very intensely focused on the values that we provide, which is one of the reasons why we were a little bit slower to make any changes to AUR because we really wanted to underscore with the customer that we were going to be delivering values, including during a tariff environment. Holding true to that, and we've called out tariff impacts over the last couple of quarters, although they're going away for the fourth quarter, holding true to that sort of promise perhaps has helped us pull in some new customers or bring back lapsed customers. We are excited about that.

I think Michael talked about in terms of transactions, AUR and UPT. Transactions was still the biggest driver of the comp. As we look at the fourth quarter, we were pretty much bought up for the fourth quarter for a while. I would not expect any significant changes in our strategy from a pricing standpoint for the fourth quarter. I think it was encouraging that we were able to have a modest increase in our AUR and not see degradation in units per transaction. That was up a little bit. I also continued to see transactions. Hopefully, that has answered the question. I mean, it has been a very difficult thing to navigate for the last several months looking at the changing in tariffs and the changes in the retail environment and trying to find exactly the right set of prices for every single category. Have we made mistakes within that?

Probably. What ultimately falls out of that is a business that may start turning slightly slower, so you may mark it down, and then you move through it. On balance, we haven't had any significant footfalls that have created massively increased markdowns or slowdown in our terms.

Brooke Roach (VP of Equity Research)

Thanks so much. Best of luck going forward.

Jim Conroy (CEO)

Thanks, Lou.

Operator (participant)

The next question comes from the line of Michael Binetti with Evercore ISI. Please proceed with your question.

Michael Binetti (Senior Managing Director and Fundamental Research Analyst)

Hey, guys. Thanks for taking our questions here. Congrats on a nice quarter. Jim, I guess as you look at marketing and some of the store refreshes and the state of the fleet today, as you look at some of the initial successes and the top-line impact here, how do you think about what to invest in and accelerate those things that are working to keep the top line going versus how you think about flowing through some of the earnings on these initiatives to investors next year? I think just at the highest level, maybe some thinking on the trade-offs between pushing sales harder now that you've got some things that are very obviously working and then flow-through versus investment next year. Separately, you've spoken a little bit about a strong pipeline of dd's stores in the past.

How are the Ross Banner stores in the Northeast area doing? Do you see an opportunity to accelerate store growth at both chains, at Ross in addition to dd's?

Jim Conroy (CEO)

Sure. Maybe I'll take the first one, and Michael will take the second piece of that in terms of store growth. On the investors' flow-through, yeah, I'm not even here a year. I was very cautious when I first got here to, quote-unquote, "listen, learn, and lead," right? I really wanted to learn a new business, a much bigger business, the off-price sector, etc. While I had some hypotheses for change, as did the team, I really wanted to be respectful of the financial model and the operating model that has been successful for the company for so long.

While we've made some changes over the last couple of quarters, and perhaps we're seeing fruits of those changes now, I'd like to let some more time go before we come out and say, "We're going to overinvest betting on the cum for future results." Anything we've done so far has been, again, within the expense structure, within the financial model the company has. We haven't spent anything in an outsized way from a marketing perspective, or really even from a store's perspective outside of sort of the capital plan that was here when I got here. Three months from now, six months from now, if we continue to see positive ROI, to your point, we may then get more aggressive and say, "Look, if we can break the model slightly from a financial standpoint, will we deliver higher comps and additional earnings?" Perhaps.

Right now, I think we're all kind of committed to the operating model that's worked for the company for decades.

Michael Hartshorn (Group President and COO)

Michael, on real estate, first on this year's store openings, as we said in the commentary, we opened 80 Ross and 10 dd's. As an entire group, the new stores have outperformed our plan, and we're very excited, although it's very early, with the success in both the Northeast and the New York stores and also in our Puerto Rico stores that opened over the summer. As I said, what we've seen thus far, we're really optimistic about a Northeast expansion. We feel good about the real estate landscape. We have a very healthy pipeline. We've said before that we're going to re-accelerate the dd's growth. In terms of the combined groups, we'll have more to say when we get to the end of the year in our 2026 guidance.

Michael Binetti (Senior Managing Director and Fundamental Research Analyst)

All right, guys. Congrats again. Best of luck to the holidays. Thank you.

Jim Conroy (CEO)

Thank you very much.

Operator (participant)

The next question comes from the line of Ike Boruchow with Wells Fargo. Please proceed with your question.

Ike Boruchow (Managing Director and Retailing, Specialty Softlines, and E-commerce Senior Analyst)

Hey, everyone. Jim has figured out ask about self-checkout. I think it's something you've talked about in the past as a driver. How many stores is that rolled out to? How meaningful can that be over the next 12 months? Just kind of how are you thinking about ROI on that investment?

Michael Hartshorn (Group President and COO)

Sure, Ike. It is in 80 stores today, and it has taken us a while to get to this point. We tried a couple of different models, and it has taken us a while to get the shrink aspect of self-checkout correct. We now have a prototype that has worked well for us over the last year, and we are not only seeing lower shrink, but we are seeing high customer adoption. We are seeing sales impacts in the stores that we put it in, and we will be rolling it out to further stores next year. How big it will be depends on kind of the next phase of rollout, but where it works best for us is in our high-volume stores. We will continue to roll it out. We will have more to say on how many of those stores in the 2026 preview.

Ike Boruchow (Managing Director and Retailing, Specialty Softlines, and E-commerce Senior Analyst)

Great. Thank you.

Operator (participant)

The next question comes from the line of Adrienne Yih with Barclays. Please proceed with your question.

Adrienne Yih (Managing Director and Consumer Discretionary Analyst)

Great. Thank you. Good afternoon. Congratulations on a great acceleration into holiday. First question on dd's. Did you see any—I mean, was it patterned very similarly to the Ross Dress for Less stores, or did you see any pressure, particularly in the early part of November with the delay of the SNAP benefits? Has that rebounded? Secondly, you mentioned that the results fully offset all of the tariff, the gross tariff amount. Should we assume that that obviously is the case for the fourth quarter, but that kind of the biggest impact because of your turns being so fast, that the biggest impact would have been felt in 2025, and we enter 2026 in a pretty normal way state in terms of tariffs, or there's probably a little bit of overhang in Q1? Thank you.

Michael Hartshorn (Group President and COO)

Adrienne, on the dd's, dd's was very similar to Ross. The business was very consistent across the quarter, so there's nothing that I would call out there. In terms of tariffs, we did say there continued to be an impact in Q3, but it will be neutral in Q4 as we've been able to chase the business with closeouts. We've been able to work with vendors on cost concessions, and I would expect it to be somewhat neutral. It is neutral in Q4 and expected to be neutral as we move into 2026.

Adrienne Yih (Managing Director and Consumer Discretionary Analyst)

Okay. My quick follow-up is just going to be there are very few companies that are exiting the third quarter with overall sales growing faster than inventory on an average basis or even at the end of the quarter. Obviously, you have built some inventory up. The availability is fantastic. Is this just sort of—do you feel—I am going to ask a question that I know the answer to. I mean, clearly, you can chase that inventory, but I guess as you think about kind of heading into spring, what are you seeing in terms of kind of being a little bit more maybe disciplined or judicious about taking some of that packaway? Any changes to strategy as we head into spring when we think that broader retail will raise prices across the board?

Michael Hartshorn (Group President and COO)

On the ending inventory, as we said in the commentary, we did end up 15% on the last day of the quarter. Actually, during the quarter, inventory was in line with sales, which, similar to prior years, holiday shopping and promotions are well underway ahead of Thanksgiving holiday and in anticipation of those shifts. We set the sales floor for the holiday as we, at the end of October, which is earlier than last year, and also advanced some of the inventory into the store.

Adrienne Yih (Managing Director and Consumer Discretionary Analyst)

Okay. Perfect. Thanks. Best of luck. Great quarter.

Michael Hartshorn (Group President and COO)

Thank you.

The next question comes from the line of Dana Telsey with the Telsey Advisory Group. Please proceed with your question.

Dana Telsey (CEO and Chief Research Officer)

Hi, good afternoon, everyone, and congratulations on the terrific results. As you take a look at your customer—thanks. As you take a look at your customer, and particularly an assessment of the lower-income customers, are you seeing anything? Are you seeing a trade-down to the core Ross? What are you seeing in dd's? Is there any difference in performance of the lower-income stores in lower-income areas versus others? Lastly, with the expansion into the New York area or the Northeast, as you think about your store expansion plans for next year, will a greater portion of those stores be in the Northeast? How do you see opening costs? Is the opportunity for greater sales from those stores in more dense areas leveraging the cost, given it may be a higher cost structure? Thank you.

Michael Hartshorn (Group President and COO)

Dana, on the trade-down customer, it's really hard to peel apart in the data. We do measure the trade area demographics around the stores, and the seven-comp was very broad-based across all income levels. We didn't see any distinction between the lower or higher-income customers. In terms of entry into the Northeast, today, about 70% of our store openings are in what I call existing markets and 30% in newer markets, which would now include the Northeast and Puerto Rico. Over the last couple of years, it's included the upper Midwest. I expect that pace to continue and will gradually continue to add in New York over time and to Puerto Rico and continue to expand those markets. We don't think our return on opening a new store will decline as we enter the Northeast.

As you say, it's more dense populations should drive up higher sales to support the additional investment and higher costs in some of the store base.

Dana Telsey (CEO and Chief Research Officer)

Just one more thing, Jim. In terms of what you're seeing with the store refreshes, the great enhancements that you're making in brand in general, other categories besides women's where you're seeing this opportunity for? When you think about the store refreshes, anything that is particularly notable that you see as the opportunity for next year? Thank you.

Jim Conroy (CEO)

We certainly have some ideas about next year, and we do not want to sort of necessarily divulge those just yet. In terms of categories that have improved, we have seen sequential improvement across a number of different businesses. Perhaps the one to call out is the home business was a drag in Q2 and was nicely positive in Q3. We feel well-positioned in that piece of the business as we go into the fourth quarter at running spikes as a percent of sales. I think that may be another category that we can talk about some of the wins that that merchandise team has pulled together. Yes, I am glad to hear the enthusiasm on store refreshes, and the stores, I think, are looking a bit better. I would come back to some of my earlier comments that it is still very early innings in some of these changes.

Maybe that just is good news in terms of the best is yet to come.

Dana Telsey (CEO and Chief Research Officer)

Thank you.

Jim Conroy (CEO)

Thank you.

Operator (participant)

The next question comes from the line of John Kernan with TD Cowen. Please proceed with your question.

John Kernan (Managing Director)

All right. Congrats on the great quarter, guys.

Jim Conroy (CEO)

Thanks, John.

John Kernan (Managing Director)

Just wanted to circle back to gross margin. The merch margin was down slightly. You're now lapping a lot of the initiatives in the branded segment. I'm just curious what you think the opportunities for merch margin are going forward. You are comfortably above the levels you were at pre-COVID as a benchmark. I'm just curious what you see as long-term drivers. I just have a quick follow-up on distribution costs.

Jim Conroy (CEO)

I mean, like you said, merch margin, although it declined, it was a little better than we expected as we had less ticketing and some stronger shrink results helped there. Moving forward, it's an area of continued focus. Certainly, we would like it to get better, but I think currently, we'd expect it to be relatively stable over time.

Michael Hartshorn (Group President and COO)

I think there is.

John Kernan (Managing Director)

Okay. Yeah.

Michael Hartshorn (Group President and COO)

We talked about we're a year and a half into the brand strategy. I think there's going to continue to be opportunity to gain some leverage as we move through time as we build the branded relationships with the vendors, gives us opportunity for closeouts. I think there's still some opportunity there. Within gross margin, the transportation cost will be a year-to-year kind of market-based discussion, but I think there's ongoing improvement capture in merchandise margins.

John Kernan (Managing Director)

Obviously, the new DC is going to give you a lot of capacity. Just curious on distribution at D-Leverage. Is that something that continues into next year? Looks like it picked up in Q2 this year, and I'm assuming it continues a little bit in the fourth quarter.

Jim Conroy (CEO)

Yeah. In Q3, that D-Leverage, like we've talked about a bit before, the full impact of the opening of a new distribution center and also some tariff-related processing costs. As we move forward, we'd expect that pressure from the new DC continued, but that pre-ticketing pressure we've seen before related to tariffs should improve a bit. We'd expect just a slight headwind in Q4.

Michael Hartshorn (Group President and COO)

As we grow capacity, we look beyond this year, we'll be able to continue to lever that new capacity until we open our next distribution center, which is two to three years away.

John Kernan (Managing Director)

That's great. Thanks, guys.

Jim Conroy (CEO)

Thank you.

Operator (participant)

The next question comes from the line of Aneesha Sherman with Bernstein. Please proceed with your question.

Aneesha Sherman (Managing Director and US Apparel and Specialty Retail Analyst)

I want to follow up on the brand strategy. As you've discussed it in the past, you've talked about not changing the good, better, best mix, but rather increasing the availability of branded goods versus unbranded and labels. As you're now attracting new customers and growing AUR and basket size, are you rethinking that and potentially considering adding more higher-end brands to expand the mix on the higher side? A follow-up on home. Jim, you talked about home getting better this quarter, though it was still weaker than the chain for two quarters in a row. Have you pulled back on the assortment at all in response to that weakness? Are there any implications there in terms of holiday and gifting and home decor assortment going into the holiday period? Thank you.

Jim Conroy (CEO)

Of course. On the home piece, absolutely not. We feel that the home business is really building momentum, and the team there has just created tremendous sequential improvement. As we get into the fourth quarter, the categories change a bit, right? Toys increases quite a bit, food increases, etc. Those businesses kind of have nothing to do with the incoming trend line, and we feel extremely well-positioned from a gifting standpoint and from a toy standpoint. In terms of branded versus unbranded, a couple of points I guess I would say is over the last several years, right, the reason the brand strategy was put in place and certainly predated me was there was a notion that the company had migrated away a little bit too much from known brands chasing higher margin or higher markup kind of tertiary players, and we needed to right that ship.

That does not always mean higher-end brands, though, right? There are some really great brands at all price points within the store, and we have a very diverse customer base in every definition of that term. We want to have the best branded values for a good, better, or best pricing tier. Is there some opportunity to stretch higher? Perhaps. The merchants are always out there looking for the next new brand. It is always a small celebration within the buying office when we have opened a new brand and we have gotten access to new closeouts, etc. Over time, perhaps that will include reaching up a little bit. I would say it is across the board.

Aneesha Sherman (Managing Director and US Apparel and Specialty Retail Analyst)

That's helpful. Thank you.

Jim Conroy (CEO)

Of course.

Operator (participant)

The next question comes from the line of Marni Shapiro with Retail Tracker. Please proceed with your question.

Marni Shapiro (Managing Partner)

Hey, guys. Congratulations on a great quarter, and congratulations on the New York store. I hear it is the place to be. I'm just curious on the marketing. It's what I'm hearing. It's what my people say. I'm so curious on the marketing side as you kind of dive a little bit more into marketing. Two things. Will you at some point consider a loyalty program, and what would that look like if you've thought about it? Are you doing even some of the more basic stuff like email or phone number capture so that you can more directly talk to your consumers?

Jim Conroy (CEO)

Not sure about the loyalty program on the email and text, but we do have a pretty decent email database in existence today, a few million active email addresses. While we do not constantly update that number to the street, we saw a really nice increase in active emails over the last quarter. That was great. We do not have an active text program at the moment. Who knows? The first order of business from a marketing standpoint was to experiment with some slightly different messaging and maybe a slightly more contemporary aesthetic. Over time, we might try some of these other ideas. Yes, the Brooklyn store has been just a great addition to the portfolio. I am glad it is the place to be seen.

We've seen a lot of interesting people come in and out of the store recently, and we're constantly kind of spying on it with our CCTV. We kind of know everybody that goes in and out. Yeah.

Marni Shapiro (Managing Partner)

Those four associates.

Jim Conroy (CEO)

Yeah. Everybody. Competitors. Everybody. So that store has been a really nice arrow in the quiver, and who knows what it bodes for future stores there. I mean, that particular location is pretty unique, very high traffic. There are other stores that we've seen open up in that area, in the New York Metro area, that have had very strong openings. Perhaps that would probably be the outlier one, the one in Brooklyn that you're talking about.

Marni Shapiro (Managing Partner)

Yep. All right. Great. Thanks, guys. Best of luck for the holiday and have a nice Thanksgiving holiday.

Jim Conroy (CEO)

Likewise. Thank you.

Michael Hartshorn (Group President and COO)

Thanks, Marni.

Marni Shapiro (Managing Partner)

Bye.

Operator (participant)

We have time for one last question coming from the line of Jay Sole with UBS. Please proceed with your question.

Jay Sole (Managing Director)

Great. Thank you so much for taking my question. Jim, my question is about the guidance because you're guiding to 3%-4% comp, and I look back, ex the post-COVID period, and the company hasn't guided above a 2%-3% in at least 10 years. I'm just wondering what this signals. I mean, are you taking a different approach to guiding now being CEO, or is it just that the quarter-to-date trends you're seeing are so good that you just felt like 2%-3% just wasn't even relevant and you had to guide to 3%-4%? Because sometimes the thought is that the guide is as much as an internal signal as an external signal, sort of a signal to sort of plan conservatively and then just be prepared to chase, keep a lot of open liquidity if opportunities materialize in the quarter.

Just kind of wondering how you're thinking about guiding and why you decided to go to three to four instead of just sticking to the same old two to three.

Michael Hartshorn (Group President and COO)

Jay, it's Michael Hartshorn. It's probably less tricky than you think. It is our internal plan. Currently coming off a seven comp, that's how the underlying business is planned, and we always try to align the internal latest forecast with the plan. There is no change in methodology. It is really how we're planning the business for the fourth quarter based on the momentum in Q3.

Jay Sole (Managing Director)

Got it. All right. Thank you so much.

Michael Hartshorn (Group President and COO)

You're welcome.

Jim Conroy (CEO)

Of course.

Operator (participant)

There are no further questions at this time, and I would like to turn the floor back over to Jim Conroy for closing remarks.

Jim Conroy (CEO)

Very good. Thank you, everybody, for your interest in Ross Stores. We wish you all a very happy holiday season. Take care.

Operator (participant)

Thank you. That does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.