ROST Q1 2026: Tariffs to slash Q2 margins by up to 120bps
- Proactive Tariff Mitigation: Management has outlined multiple strategies—such as negotiating better vendor pricing, pausing ticketing to assess cost impacts, and leveraging packaway merchandise and closeouts—to mitigate tariff-related headwinds.
- Successful Branded Strategy: Executives highlighted that the rebranding and assortment repositioning—particularly in women’s apparel—has eliminated earlier margin pressures, with the women's segment trending slightly above the chain average.
- Robust Operational Momentum: The sequential, month-over-month improvement in store performance across both Ross and dd’s stores underscores strong execution in a challenging environment.
- Tariff‐Driven Margin Pressure: Executives noted that tariffs led to a 90 to 120 basis point negative impact on Q2 operating margins, with costs on orders already in transit that couldn’t be mitigated—raising concerns over further compression of profitability.
- Macroeconomic Uncertainty and Limited Visibility: There was significant emphasis on the lack of clarity regarding future consumer demand amid prolonged inflation, deteriorating sentiment, and fluctuating tariffs, which could result in weaker comparable sales and pressured earnings in the back half.
- Underperformance in Key Geographies: Discussion highlighted that border stores, notably in Texas, underperformed due to cross-border traffic delays, suggesting potential operational challenges in critical regions that could hurt overall results.
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | 2.6% increase ( ) | Q1 2026 total revenue rose to 4,984.971 million USD from 4,858 million USD in Q1 2025, reflecting a consistent gain likely driven by uniform strength across product lines and improved customer demand compared to the previous period ( ). |
Business Segments | 2.6% increase across all segments ( ) | All segments, including Home Accents & Bed & Bath (from 1,263.08 to 1,296.092 million USD), Ladies (from 1,117.34 to 1,146.543 million USD), Men's (from 680.12 to 697.896 million USD), Accessories (from 728.70 to 747.746 million USD), Shoes (from 631.54 to 647.046 million USD), and Children's (from 437.22 to 448.647 million USD), increased by roughly 2.6% YoY, reflecting steady organic growth ( ). |
Operating Cash Flow | 11% increase ( ) | Net cash provided by operating activities increased to 409,715 thousand USD in Q1 2026 from 368,921 thousand USD in Q1 2025. This improvement suggests more efficient working capital management and possibly better conversion of revenue into cash, compared to the prior period ( ). |
Net Earnings | 1.8% decrease ( ) | Q1 2026 net earnings declined slightly to 479,249 thousand USD from 487,990 thousand USD in Q1 2025. Despite revenue gains, the margin pressure or increased operating expenses may have contributed to this modest decrease ( ). |
Earnings Per Share | N/A (Q1 2026: Basic EPS 1.48; Diluted EPS 1.47) | The EPS levels for Q1 2026 (basic 1.48, diluted 1.47) reflect the impact of the modest decline in net earnings and potential adjustments in share count, though no direct YoY percentage change is provided ( ). |
Cash Position | Net decrease of 947,472 thousand USD ( ) | The cash position fell by 947,472 thousand USD during the quarter, ending at 3,848,990 thousand USD, primarily due to aggressive uses of cash in financing activities—including significant debt repayments and share repurchases—and investing outflows, which were more pronounced than the operating cash gains ( ). |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Comparable Store Sales | Q2 2025 | no prior guidance | flat to up 3% | no prior guidance |
EPS | Q2 2025 | no prior guidance | $1.40 to $1.55 | no prior guidance |
Total Sales | Q2 2025 | no prior guidance | 2% to 6% | no prior guidance |
Operating Margin | Q2 2025 | no prior guidance | 10.7% to 11.4% | no prior guidance |
Distribution Costs | Q2 2025 | no prior guidance | Expected to be higher | no prior guidance |
Net Interest Income | Q2 2025 | no prior guidance | $29 million | no prior guidance |
Tax Rate | Q2 2025 | no prior guidance | 24% to 25% | no prior guidance |
Diluted Shares Outstanding | Q2 2025 | no prior guidance | Approximately 325 million | no prior guidance |
Store Openings | Q2 2025 | no prior guidance | 31 stores (28 Ross; 3 dd's) | no prior guidance |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Tariff Impact | Q3 2025: Tariffs were being closely monitored with a view to their potential effect on pricing and margins. Q2 2025: No discussion on tariffs. | Q1 2026: Detailed discussion on tariff impact with a 45 basis point merchandise margin decline, Q2 guidance showing a projected negative impact of $0.11–$0.16 per share, and acknowledgment of long‐term uncertainty. | Increased emphasis and detail in the current period, making tariffs a more critical short‑term concern. |
Merchandise Margin Pressure & Improvement | Q2 2025: Discussed an 80 basis point margin decline due to increased branded product penetration, offset by cost improvements (distribution, freight, and SG&A). Q3 2025: Reported a 60 basis point decline partially offset by better shrink results and highlighted long‑term margin improvement potential. | Q1 2026: Noted a 45 basis point decline driven by higher ocean freight costs and tariff impacts; mitigation strategies have been implemented with an expectation of neutral margins excluding tariff effects. | Consistent pressure from external and strategic factors, with ongoing efforts to mitigate and improve margins. |
Brand Strategy and Merchandising Execution | Q2 2025: Emphasized increased branded product penetration leading to a marginal AUR increase and associated short‑term impact on margins, while working on refining the mix. Q3 2025: Focused on a “good, better, best” strategy with adjustments based on customer feedback and noted execution challenges being addressed. | Q1 2026: Demonstrated strong progress in execution with repositioned assortment, improved performance in Ladies’ apparel, and strong cosmetics performance; noted that prior margin headwinds from the strategy have been fully anniversaried. | Recurring with improved sentiment: While the focus remains consistent, Q1 2026 shows enhanced execution and optimism. |
Operational Performance and Domestic Expansion | Q2 2025: Posted robust sales growth (7% to $5.3 billion), improved operating margins, significant cost efficiencies, and aggressive store opening programs. Q3 2025: Continued momentum with sales growth, share repurchases, and extensive expansion (new store additions and relocation/closure plans) across regions. | Q1 2026: Reported moderate sales growth (3% to $5 billion), stable comparable store sales, robust inventory management, and a planned series of new store openings despite some headwinds from tariffs. | Steady operational momentum: Consistent expansion and performance, though Q1 2026 shows cautious execution amid external challenges. |
Macroeconomic Uncertainty and Consumer Demand Volatility | Q2 2025: Highlighted an uncertain external environment with persistent inflation on necessities, prompting a cautious sales forecast, and noted consumers’ increased focus on value. Q3 2025: Discussed external pressures such as weather impacts along with economic headwinds affecting discretionary spending. | Q1 2026: Emphasized prolonged inflation, deteriorating consumer sentiment, and heightened tariff concerns, leading to the withdrawal of annual guidance and a very cautious outlook for Q2. | Elevated uncertainty and caution in the current period, with a clearer focus on the negative impact of macro factors. |
Efficiency Initiatives and Enhanced Vendor Relationships | Q2 2025: Detailed various efficiency initiatives (automation in distribution, self-checkout pilots, flexible scheduling) and outlined efforts to enhance vendor relationships with an expanded vendor base. Q3 2025: Mentioned ongoing cost control measures and efforts to build stronger vendor relationships to gradually improve margins. | Q1 2026: No explicit mention of efficiency initiatives or enhanced vendor relationships; related cost management strategies are indirectly noted as part of tariff mitigation. | Reduced explicit focus in Q1 2026: While still critical, these themes are less emphasized and appear integrated into broader strategies. |
Real Estate Constraints Affecting Store Expansion | Q3 2025: Acknowledged that tight real estate availability (due to few new shopping centers and heightened competition) was a constraint, but maintained confidence in a strong real estate pipeline. Q2 2025: No mention of this topic. | Q1 2026: No discussion regarding real estate constraints is present. | Topic dropped in Q1 2026: Suggests that real estate constraints may have eased or been deprioritized relative to other issues. |
Shrinkage and Retail Theft Concerns | Q2 2025: Noted challenges from retail theft with anticipated shrink deterioration and outlined loss prevention initiatives. Q3 2025: Reported flat shrink year‑over‑year with better-than-expected shrink adjustments from the physical inventory process, with retail theft concerns acknowledged but not significantly impacting results. | Q1 2026: This topic was not mentioned at all. | Disappeared in Q1 2026: The absence may indicate improved conditions or a shift in focus away from shrink and theft issues. |
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Tariff Impact
Q: Will tariffs ease mid-year?
A: Management explained that the Q2 margin hit stems largely from orders already in transit and higher ocean freight, with mitigative actions underway though full easing remains uncertain. -
Pricing Strategy
Q: Why absorb costs rather than raise prices?
A: They stressed maintaining their value proposition amid broad inflation, choosing to absorb the tariff hit to keep prices competitive with peers. -
Guidance Scenario
Q: What are the comps and revenue scenarios?
A: They flagged a flat to +3% comps outlook for Q2, citing macro uncertainties and tariff exposures as reasons for a cautious guidance range. -
Tariff Strategy
Q: How will sourcing shift by year-end?
A: While they are exploring sourcing alternatives, the majority of merchandise will continue coming from China, with no dramatic shift expected in the near term. -
Inventory Concerns
Q: What about inventory risks in H2?
A: Management believes a strong influx of closeouts will mitigate near-term receipt risks despite earlier production pauses in China. -
Regional Performance
Q: Any geographic differences and dd’s update?
A: They noted that while the Southeast performed strongly, border stores—particularly in Texas—lagged due to cross-border delays, with dd’s posting consistent gains. -
SG&A Impact
Q: How will incentive changes affect SG&A?
A: SG&A remained flat this quarter; however, over a longer period, they expect a 3–4% efficiency leveraging lower incentive costs. -
Traffic & AUR
Q: How did traffic and AUR perform?
A: The quarter saw sequential improvement with a solid April comp, where increased transactions and modest AUR gains contributed to a robust exit. -
Brand Strategy
Q: How is branded repositioning going?
A: They reported that the branded strategy is meeting targets, especially lifting the Ladies segment, with initial margin pressures now behind them. -
Cost Mitigation
Q: How effective are vendor cost negotiations?
A: Some mitigation was achieved through vendor cost adjustments, although tariff costs on in-transit orders limited overall impact reduction. -
Store Openings
Q: How many dd’s stores were opened?
A: The company opened 3 dd’s stores this quarter and is leveraging packaway strategies to ensure timely inventory replenishment. -
Income Impact
Q: Are customer income trends shifting?
A: Management observed that comp performance was broadly consistent across income bands, with a slightly higher basket offset by lower traffic in early periods. -
Price Elasticity
Q: How flexible is price adjustment across categories?
A: They noted that pricing elasticity varies by product, requiring a tailored approach across discretionary and functional items. -
Category Shifts
Q: Any shifts in sourcing within categories?
A: While there's flexibility to adjust assortments, major category shifts will likely occur in 2026, with limited changes expected this year. -
Customer Behavior
Q: Are buying patterns changing noticeably?
A: There’s been minimal change in customer behavior, though a modest shift toward more functional items was noted without significant disruption. -
Cosmetics Strength
Q: What drives the cosmetics strength?
A: The cosmetics segment benefited from strong brand execution and a well-curated assortment, sustaining margins and overall basket stability.
Research analysts covering ROSS STORES.