Q3 2025 Earnings Summary
- Expected improvement in merchandise margins over time as Ross Stores strengthens brand relationships and better understands customer preferences, leading to potential earnings accretion.
- Confidence in achieving 2% to 3% comparable store sales growth in the fourth quarter, bolstered by strong performance in key holiday merchandise areas and effective merchandising strategies, suggesting solid revenue growth prospects.
- dd's DISCOUNTS stores are outperforming Ross Stores, with strong value and fashion offerings resonating well with shoppers, indicating potential for growth in this segment.
- Execution issues in merchandising led to disappointing third quarter sales, with business slowing from solid gains reported in the first half of 2024. The company acknowledged they "didn't probably move as quickly as we should have" in response to product shifts, and had "some execution issues in a couple of businesses" that they are in the process of fixing. ,
- Merchandise margin pressure continues, with a 60 basis point decrease in merchandise margin in the third quarter, partially offset by one-time benefits like lower incentives and better-than-expected shrink results. The company expects further decline in merchandise margin in Q4 as they increase the penetration of quality branded merchandise. , ,
- The tight real estate market may limit store growth opportunities, as there is "increased interest from other retailers in the types of real estate that we typically prefer" and "not a lot of new centers being constructed". This could constrain the company's expansion plans in the coming years.
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | +3% | Higher customer traffic and additional store openings continued to boost sales compared to the prior year, although the growth rate moderated slightly due to normalizing inflation and a tough comparison against last year's strong results. |
Operating Income | +9% | Improved cost management, including lower distribution and freight expenses, helped offset rising SG&A costs. Combined with steady sales growth, this lifted profitability more steeply than revenue alone. |
Net Income | +9% | Higher merchandise margins and effective expense control strengthened net income. This was partly supported by share repurchases, which also contributed to a more favorable earnings base compared to the previous period. |
EPS (Basic) | +12% | Benefits from increased sales, better operating leverage, and share repurchases reduced the share count, enhancing the year-over-year gain in earnings per share beyond the net income increase. |
EPS (Diluted) | +11% | Strong operating results combined with ongoing stock buybacks drove diluted EPS up considerably. Even though there was a slight dilution effect from outstanding share-based compensation, net income growth more than offset this impact. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Comparable Store Sales | Q4 2025 | no prior guidance | 2% to 3% | no prior guidance |
EPS | Q4 2025 | no prior guidance | $1.57 to $1.64 | no prior guidance |
Total Sales | Q4 2025 | no prior guidance | -1% to -3% | no prior guidance |
Operating Margin | Q4 2025 | no prior guidance | 11.2% to 11.5% | no prior guidance |
Net Interest Income | Q4 2025 | no prior guidance | $35 million | no prior guidance |
Tax Rate | Q4 2025 | no prior guidance | 24% | no prior guidance |
Weighted Avg Diluted Shares | Q4 2025 | no prior guidance | 329 million | no prior guidance |
EPS | FY 2025 | no prior guidance | $6.10 to $6.17 | no prior guidance |
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Merchandising Execution & Brand Strategy Impact
Q: Are execution issues related to brand strategy shift?
A: Execution issues are due to merchandise mix issues, not directly related to the brand strategy. The brand strategy continues to iterate based on customer feedback, aiming to deliver compelling value at all brand tiers without focusing on increasing AUR. Over time, we expect slight improvements in margins as we build brand relationships and learn what works best with our customers. -
Fourth Quarter Guidance and Comp Confidence
Q: What gives you confidence in achieving 2–3% comps for Q4?
A: Many of the businesses important during the holiday season, such as gifting, cosmetics, and accessories, have been strengths for us. We are building on last year's success in gift giving, and these businesses are performing well now, which gives us confidence in guiding to 2% to 3% comps in the fourth quarter. -
Margin Outlook and Shrink Impact
Q: How did shrink impact margins, and what is the outlook?
A: Merchandise margin declined by 60 basis points in Q3, but we benefited from better-than-expected shrink results after our physical inventory process. Looking forward to Q4, we expect increased pressure on merchandise margin as we offer more sharply priced brands for the holiday season. For the year, shrink looks to be about flat to 2023. -
Management Transition and Strategy Continuity
Q: Will there be changes to strategy with new leadership?
A: We don't foresee any changes to our strategy because our brand strategy is key to our market share gains. My focus will be to help Jim onboard and to ensure merchandising continues effectively. Jim is a seasoned CEO who complements our strengths in merchandising and operations, so we expect a smooth transition. -
Sales Cadence and Comp Drivers
Q: How did sales trend during the quarter, and what drove comps?
A: Sales were strongest early in the quarter but became more challenging as weather deteriorated. We saw improvements in sell-throughs when weather improved. Comps were driven by traffic, while other components like basket size were relatively neutral. -
Brand Strategy and Margin Implications
Q: Is the brand strategy causing multiyear margin headwinds?
A: Over time, as we build brand relationships and learn what works best with our customers, we expect earnings accretion and slight improvements in margins. The brand strategy is not about raising average unit retail but about delivering compelling value across all brand tiers.
Research analysts covering ROSS STORES.