ROSS STORES, INC. (ROST)·Q3 2025 Earnings Summary

Executive Summary

• Q3 2025: Sales $5.10B (+3% YoY), comps +1%, diluted EPS $1.48 vs $1.33 last year; operating margin expanded 75 bps to 11.9% on lower incentive, freight, and distribution costs despite planned merchandise margin pressure .
• EPS was above plan; margin beat driven by better-than-expected shrink true-up and cost controls; merchandising execution issues and severe weather (~1% comp headwind) weighed on sales .
• Q4 2025 guidance reaffirmed comps +2% to +3% and EPS $1.57–$1.64 (includes ~$0.03 packaway timing headwind); FY EPS raised to $6.10–$6.17 (vs $5.56 last year, which had a 53rd week ~$$0.20 benefit) .
• Catalysts: Margin resilience (cost controls, shrink), clarity on brand/value strategy, and Q4 holiday exposure in strong categories (gifting, cosmetics); watch packaway headwind, branded mix pressure on merch margin, and potential tariff risks .

What Went Well and What Went Wrong

What Went Well

• Margin expansion: Operating margin up 75 bps to 11.9% as lower incentive, freight, and distribution costs offset planned merchandise margin decline; EPS $1.48 beat internal expectations .
• Shrink true-up benefit: CFO noted merch margin decline of 60 bps was helped by better-than-expected shrink during physical inventory; EPS beat also aided by interest income and cost management .
• dd’s DISCOUNTS outperformed: Strong value/fashion resonated; comps exceeded Ross; newer markets improving, with cautious stance before reaccelerating openings .

Selected management quotes:

• “Operating margin for the quarter was 11.9%, up from 11.2% last year, as lower incentive, freight and distribution costs more than offset the planned decline in merchandise margin.”
• “Merchandise margin…declined by 60 basis points in Q3…benefited from better-than-expected shrink results.”
• “dd’s DISCOUNTS…comp gains exceeding Ross’ results.”

What Went Wrong

• Sales softness and execution: Business slowed vs H1; merchandising execution issues identified, especially in certain apparel categories (ladies) .
• Weather headwinds: Hurricanes Helene/Milton and unseasonably warm temperatures reduced comps by ~1% .
• Merchandise margin pressure: Branded value strategy continues to weigh on merch margin, expected to step up in Q4; packaway timing shifts will add ~$0.03 EPS headwind in Q4 .

Financial Results

Notes: Gross margin and net income margin are derived from reported Sales, COGS, and Net Earnings; citations reference the source numbers .

Margin Drivers – Q3 2025 (basis points vs LY)

Selected Business Metrics

Guidance Changes

Earnings Call Themes & Trends

Management Commentary

• Barbara Rentler (CEO): “We are disappointed with our third quarter sales results…we believe we should have better executed some of our merchandising initiatives…Despite the below-plan sales results, earnings were ahead of our expectations.”
• Adam Orvos (CFO): “Merchandise margin…declined by 60 basis points in Q3…benefited from better-than-expected shrink…We expect operating margin [Q4] to be in the range of 11.2% to 11.5%…Net interest income…~$35 million; tax rate ~24%.”
• Michael Hartshorn (COO): “Comps were driven by traffic…Domestic freight…expect…similar in Q4…Distribution costs another source of strength.”

Q&A Highlights

• Merchandising execution: Team identified mix/execution issues, focusing especially on ladies apparel; confidence into holiday given strength in gifting, cosmetics, accessories .
• Margin drivers: Shrink true-up aided Q3; branded penetration to pressure Q4 merch margin; domestic freight/distro/incentives are offsets; leverage point remains 3–4% comps .
• dd’s and regional trends: dd’s outperformed; California and Texas strongest regions in Q3; Northeast openings early but promising .
• Guidance clarifications: Q4 outlook unchanged except packaway timing (-$0.03); comps acceleration based on strong holiday categories and improving seasonal weather .
• Tariffs and freight: Monitoring potential tariffs; will maintain value vs traditional retailers; ocean freight neutral short term; domestic freight favorable .

Estimates Context

• Wall Street consensus (S&P Global) for Q3 2025 EPS and revenue was unavailable due to data access limits. As a proxy, management’s prior guidance from Q2 for Q3 EPS was $1.35–$1.41; actual EPS of $1.48 exceeded this range, driven by shrink benefit and cost efficiencies .
• Given the branded-mix headwind to merch margin and packaway timing, estimates for Q4 may need to reflect lower EPS ($1.57–$1.64 vs prior $1.60–$1.67) and operating margin 11.2%–11.5% while maintaining comps +2%–+3% .
  Values retrieved from S&P Global were unavailable due to request limits.

Key Takeaways for Investors

• Margin resilience offsets sales softness: Cost controls (freight, distribution, incentives) and shrink drove Q3 margin expansion; expect some normalization in Q4 with packaway timing headwind .
• Execution improvements in apparel are critical: Ladies category remains the focus; progress here is likely the key swing factor for Q4 holiday performance and beyond .
• dd’s as a relative bright spot: dd’s outcomping Ross suggests value resonance with lower-income consumers; monitor trend sustainability before reaccelerating openings in newer markets .
• Q4 setup: Stronger holiday categories (gifting, cosmetics) underpin comp guidance; watch weather volatility, brand-mix margin pressure, and tariffs .
• FY EPS raised: $6.10–$6.17 reflects YTD beats and Q4 outlook despite lower Q4 EPS vs prior guide; share count down (~329M) supports EPS .
• Longer-term thesis: Brand/value strategy aims for earnings accretion over time as vendor relationships deepen; continued automation and productivity investments should provide cost tailwinds .
• Trading implications: Near-term focus on Q4 margin cadence (merch margin vs cost offsets) and holiday comps trajectory; any evidence of improving apparel execution could be a positive catalyst, while higher branded penetration without cost offsets may pressure gross margin .