Ross Stores, Inc. (ROST) Q2 2027 Earnings Call Transcript

Good afternoon and welcome to the Ross Storrs second quarter 2026 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, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. Before we get started, on behalf of Ross Storrs, 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 in the company's Fiscal 2025 Form 10-K and Fiscal 2026 Form 10-Q and 8-Ks on file with the SEC. Now, I'd like to turn the call over to Jim Conroy, Chief Executive Officer.

Thank you, Diego, and good afternoon, everyone. 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 Cowell, Senior Vice President, Investor Relations. Before discussing our results, I want to recognize the outstanding team across the company and throughout the country. The robust sales and earnings growth in the quarter are a direct reflection of your hard work and commitment to the ROST organization. Now turning to our results. We are extremely pleased with the 10% comparable store sales growth we delivered in the second quarter, marking the second quarter in a row with double-digit comp ropes sales were strong in May and improved sequentially each month with July delivering our strongest performance despite cycling a strong back-to-school performance last year customer traffic once again served as a primary driver of our comparable store sales increase which underscores the durability of our growth and the momentum we are building we believe the increased traffic reflects the effectiveness of our customer acquisition efforts during a quarter we saw gains from new and lapsed customers along with more frequent trips and higher spending from existing customers reflecting deeper engagement with both of our chains importantly the new customers we are attracting span a broad range of income demographics and age cohorts including younger shoppers which we believe reflects the broad appeal of our brand and the success of our marketing efforts in reaching and engaging a diverse customer base once in our stores both new and except existing customers are responding to our compelling values and a broader selection of fashion and brands the merchants and planners have done a terrific job of opening new vendors and satisfying the demands of a wide variety of customers finally our stores organization has done an excellent job enhancing the in-store shopping experience and managing the elevated sales volumes we feel great about the early success of our growth and strategies and of confidence in our ability to continue to gain market share consistent with the trends we saw in recent quarters the strong performance at Ross was broad based across both merchandise categories and geographies in the second quarter home and cosmetics were our strongest businesses by geography we saw strength across all markets with the Midwest performing the best BD's discounts also delivered solid sales and saw similar broad-based performance across merchandise areas and geographic regions turning to inventory consolidated inventories at quarter and increased 18 percent pack away represented 36% of total inventory compared with 38% last year we are leveraging our inventory position to not only meet the demand of higher customer traffic in our stores but also to broaden our merchandise offerings on the selling floor across our store base these efforts are leading to higher sales and improved merchandise margins while maintaining fast inventory terms We are pleased with both the level and composition of our inventory and continue to have plenty of flexibility to capitalize on closeout opportunities as we enter the fall season. Turning to store growth, we are now planning to open 115 locations in 2026, up from 110 in our prior guidance. We are particularly encouraged by the strength of our recent openings in both existing and newer markets giving us added confidence in our ability to continue to grow our store base over time our plans also contemplate approximately five to ten store relocations and closures overall we remain confident that the actions we are taking across merchandising marketing and stores are enhancing the customer experience and driving strong performance while the results to date are encouraging, we believe we are only beginning to realize the full potential of many of our initiatives. Our sustained sales performance reinforces our confidence that our more growth oriented approach is resonating with customers. The team is energized by the opportunities ahead and we see significant runway to build on the current momentum and drive continued sales gains over time now bill will provide further details on our second quarter results an additional color on our outlook for the remainder of the year thank you Jim building in our success from the first quarter we reported very strong sales and earnings results for the second quarter total sales for the period grew 13 percent to six point three billion dollars with comparable store sales increasing 10 percent.

As Jim mentioned earlier, the double-digit comp growth was primarily driven by an increase in the number of transactions. Gross margin improved by 625 basis points, driven primarily by 405 basis points of tariff refunds. Merchandise margin increased by 110 basis points, while distribution costs were lower by 100 basis points, given favorable timing of pack-away-related expenses, higher productivity, and as we anniversary'd last year's tariff-related processing costs. In addition, occupancy costs leveraged by 25 basis points. Partially offsetting these benefits were buying costs, which deleveraged by 5 basis points from higher incentives and an increase in freight costs of 10 basis points due to higher fuel prices. SDNA for the period deleveraged by 15 basis points due to higher incentives given the earnings out performance. Second quarter operating margin increased 610 basis points, which included the aforementioned 405 basis points from tariff refunds. Excluding this benefit, operating margin increased 205 basis points compared to the prior year. Second quarter net income was $851 million compared to $508 million last year, and earnings per share were $2.66 compared to $1.56 in the prior year period. Sales for the first six months of 2026 grew 17% to $12.3 billion, up from $10.5 billion in the prior year. Comparable source sales for the first half of 2026 were up 13%, and earnings per share were $4.69 compared to $3.03 for the first half of 2025. As a reminder, both the second quarter and first six months results in 2026 include $253 million or approximately $0.60 in earnings per share of tariff refunds. Now to our shareholder return activity. As noted in today's release, we repurchased approximately 1.4 million shares during the quarter for an aggregate total cost of $319 million under the two-year, $2.55 billion authorization approved by our Board of Directors in March of this year. We remain on track to buy back a total of $1.275 billion in stock during 2026. Now let's discuss our outlook for the remainder of 2026. As noted in today's press release, we exited the quarter with building momentum, and we are excited about the plans we have in place as we enter the fall season. Despite facing significantly more challenging year-over-year comparisons in the back half of the year, we are raising our outlook for both the third and fourth quarters. Comparable store sales are now forecasted to increase 6% to 7% in the third quarter, with earnings per share expected to be in the range of $1.75 to $1.83 versus $1.58 last year. Our guidance assumptions for the third quarter of 2026 reflect. Total sales are forecast to increase 9% to 11% versus the prior year. If same-store sales perform in line with our forecast, operating margin for the third quarter is planned to be in the range of 11.7% to 12.0% compared to 11.6% last year. Our forecast reflects leverage from the expected comp store sales increase as well as slightly higher merchandise margins. Partially offsetting these benefits are higher freight costs given the increase in fuel prices. As mentioned earlier, we raised our new store opening plans for the year and now expect to open 51 stores during the third quarter, including 41 Ross and 10 DDs locations. Net interest income is estimated to be approximately $30 million. The tax rate is projected to be about 25%, and diluted shares outstanding are expected to be approximately $319 million. Moving to the fourth quarter, comparable store sales are now expected to increase 4% to 5% on top of a robust 9% increase last year. Earnings per share are planned to be in the range of $2.17 to $2.26, compared to $2 for the same period in 2025. As the second half of 2026 performs in line with these projections, earnings per share for the full year are now forecast to be in the range of $8.61 to $8.77 versus $6.61 last year. included in this year's forecast is approximately 60 cents of earnings per share from tariff refunds now I'll turn the call back to Jim for closing comments Thank You Bill we delivered robust first-half results and remain encouraged by the positive trends we are seeing across the business while we are pleased with the progress we have made over the last several quarters we remain focused on building on that momentum the work underway across the organization is

centered on continuing to strengthen our brand relevance, delivering world-class merchandise assortments, and further improving the in-store experience. We believe we have only begun to tap into the full growth potential of the business. At this point, we would like to open the call and respond to any questions that you may have.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

And our first question comes from Matthew Boss with J.P.

Morgan. Please state your question.

Thanks, and congrats on a really great quarter.

Thanks, Matt. Thank you, Matt.

So, Jim, could you elaborate on the build in top-line momentum that you saw across the second quarter and drivers of this exit rate strength? And just despite the tougher comparisons, could you speak to the opportunity you see remaining in the back half of the year and beyond across the assortment, marketing, and in-store execution?

Sure, happy to. the quarter was really solid and where we're thrilled by not only the underlying growth number that the 10 comp but the quality of the comp it's really driven mostly by more transactions those transactions are driven by customer capture both new and regaining last customers we're seeing existing customers shop more frequently we're seeing all customers spend more so from the customer KPIs are just extremely solid the merchandise KPIs are also solid switching broad-based brands across all merchandise categories in bulk chains ROS and DVDs the geographic metrics are equally strong We've seen broad-based strength across the country. As we went through the quarter, we had a little bit of, you know, we felt World Cup a little bit in June. We saw a really strong July, and if you recall on our last year call, we talked about July had a very nice acceleration from June. So putting a strong July, a very strong July, which you could surmise had to be more than 10% if it was the strongest month of the quarter, up against a very strong July last year, the exit velocity was very, very good. We got into August where we continue to be very encouraged by the current business and the momentum that's been building. Last year, August was the strongest month of the quarter. so if we we continue to believe that we shouldn't be concerned about cycling strong comps and on prior calls we've talked about sort of two schools of thought can you comp the comp versus are you building momentum and can the fly wheel continue to grow the business hopefully after the fourth quarter of really strong comps and laying out next two quarters of we believe pretty solid guidance that we can extinguish that concern because the underlying metrics that we see are just extremely positive across the board. If you come all the way back to some of the initiatives that we started last year, they're all still in the early innings and some of them have been implemented across the chain but some are only in some stores. Some of them have been implemented across all merchandise categories, and others are still waiting to be further implemented. And, of course, we've also launched new initiatives. So I can't underscore enough that our outlook for the balance of the year continues to be extremely positive with a number of opportunities to continue the growth that we're seeing.

Great, Cutler. Best of luck.

Thank you. Your next question comes from Lorraine Hutchinson with Bank of America. Please state your question.

Thanks. Jim, you just did a 10-comp, and you're still talking about a lot of these initiatives being early stage. So can you talk a little bit about which of these initiatives you see having the most runway to continue to drive to this guided comp strength?

Sure. I'll talk at a relatively high level. you know one of the things I've learned is my natural propensity to provide more detail just exposes us to other retailers sort of picking up what we're doing and trying to emulate them very quickly but in in with some desire to provide some transparency let's anchor back to sort of merchandising stores and marketing and I could list probably a dozen initiatives onto each of those The merchant team has really done a great job of continuing to build great assortments, opening up new vendors and new brands, starting to tell better merchandise stories across categories. The stores team has – I'd encourage everybody on the call to go to a store, and you'll see very well organized stores, inventory being recovered quickly, queue lines are shorter. So the stores team has really been able to rise to the challenge of a pretty sharp acceleration in sales over the last year or so. And then from a marketing standpoint, again, you can see what we're doing from a marketing You can see our spots. You can follow us on social media. We're getting a tremendous amount of engagement with our new creative messaging. We've tweaked our media mix. But if I went through each of those points that I just made, and the other dozen or so points that I haven't explicitly called out, there's no way you could believe that we've fully executed and implemented all of them. So we sit and look at the business and just wake up every day with more ideas that continue to drive more growth.

That was really helpful.

Of course. Your next question comes from Corey Tarlow with Jefferies. Please state your question.

Great.

Jim, the comp momentum continues to be very impressive. and a lot of the work that we've done around marketing continues to show really strong momentum there. I'm just curious how you think about how the marketing is fueling new customer acquisition and whether or not these newer customers that you're acquiring are higher income in nature and the types of products that these customers are purchasing as well relative to some of the products that you had in your prior assortments.

Sure. The marketing team, both the creative team and the analytics team and the folks that are buying our media, I think are doing a tremendous job. And I circle back to you, but we're still learning. We still think there's some more opportunity for us to improve. we've absolutely seen brand new customers come into Ross NDDs that hadn't shopped with us in the past as well as recapturing customers that perhaps used to shop with us and they're returning. In terms of what the new cohort of customers look like, I couldn't describe a better report card if I'm we've seen the quick answer is our new customer and the profile of them as a group look very similar to the composition of our current customers which would imply that we're seeing growth across every single household income group that we track every single age group that we track and every single ethnicity so it's it's been just a broad-based increased in customer capture across all dimensions which is handy because that means that the proposition that we have in the stores that we already know works for our current customer will work for sort of a new cohort of customers does that answer your question?

Yes, it's very helpful.

Thanks so much and best of luck.

Thank you. Your next question comes from Chuck Grom with Gordon Haskett. Please state your question.

Hey, thanks a lot. Jim, could you talk about your success over the past year and how it's translated into stronger, a stronger vendor flywheel, both in terms of new suppliers entering the mix, but also deeper relationships with existing vendors?

And then the follow-up question is just on the lapsed customer opportunity I don't think you brought that up in the past can you maybe just size that up for us thank you you know we've been here for a little over 18 months now I continue to marvel at the strength and partnership that we have with the vendor community and it's their their true partners and they're the lifeblood of our growth the team and this absolutely predates me. I'm learning off Price. The team under Karen and Karen, and these are the divisions, absolutely aim to be genuine partners and easy to work with our vendors. And I hear that all the time. The partnership with our current vendors and bringing on new vendors I think ties to the same two or three things that are happening within the business number one just our growth right we're continuing to post nice growth I think any vendor appreciates that and maybe a rising tide rises lists all boats the second piece is some vendors that perhaps had been resistant to sell to off price or maybe specifically to Ross in the past now go the stores and see that you know their product will be showcased and merchandise in a sort of neat and tidy way and and the white what the store scheme has done in enhancing the shopping experience in store has probably further helped the experience with our vendors because they know that the product will be treated sort of with great care and then finally I do hear oftentimes from our vendors as they see the change in the brand positioning that, you know, they believe it's a fun and exciting brand now, and they want to participate in So when you put all those three things together, I think the partnership with our existing vendors continues to be quite strong, and the merchants and their persistence in trying to open up more and more brands has continued to become more successful. I'm not convinced I answered both of your questions. Did I cover everything?

You definitely answered the first one. I was curious. You talked about a lot of the traffic being from new customers, but also from lapsed customers.

So I just was wondering if there was a way to size up that opportunity and maybe how the team is going after those lapsed customers maybe a little bit more aggressively. sure and let me just give you a little insight as we get how we get that information you know we use a third-party credit card vendor it's widely available on the market for anyone else to pay for it so we can see credit card numbers that haven't been in the store in X period of time and then when they return right so that's how we're measuring it and And it's somewhat of a new muscle where we are strategically prospecting for them from a marketing standpoint and how we're spending our money. And now we have an ability to measure it based on that credit card data, albeit it might be a little rough, it's certainly directional. And, you know, the goal, of course, is to show them just a world-class merchandise assortment once they get in the store, and have them have a great experience, and encourage them to come back, and come back more frequently, and we're seeing that as well.

Your next question comes from Paul LeJouet with Citigroup, please state your question.

Hey, thank you. Jim, I'm curious if there's any way you can quantify for us the number of new customers that you're seeing on a year-over-year basis. How did it look in 2Q sales coming from new customers versus what you saw in 1Q? and kind of the same question on the vendor side any way to frame the number of vendors you're currently working with today versus let's say a year ago how would you characterize the new vendors is there a common thread and what is ultimately the right number of vendors to be working with thanks on the vendor question there are times when we're trying to invite in a stronger national brand into the store and when they come in there's occasion when it's a net new

ad but there's also an occasion where they take the space from a vendor that perhaps is you know more tertiary in nature so the the vendor count wouldn't really get wouldn't really get you there I think if you walk the store and look at the vendor brand plates that are in the store you'll start to get a sense for not necessarily always higher price point vendors but just the the strength of the brands that we're carrying now which honestly is just an extension of the brand strategy that started a few years ago in terms of the quantifying that the customer capture and it would be hard to to provide that much data and I suppose it's a little proprietary also but if you parse out some of the things we've said attend comp most of that was transactions a small portion of it was an increase in basket and of those transactions it was a combination of brand new customers, returning customers that used to shop with us, and existing customer shopping more frequently. I wouldn't say the third, a third, a third necessarily, but I would think of it in those three buckets. So each of them are meaningful in their own right, meaning just the new customers that are coming, or just recapturing the lapsed customers, or just getting current customers to shop more frequently. um and again i think we can continue to find opportunities to do more of all of that your next question comes from michael benetti with evercore isi please see your question hey guys let me add my congrats on a nice quarter um i'll ask one and then if it's okay i'll ask a follow up after but you know you've talked about a lot about vendor better vendor acceptance stronger

merchandise availability as you know the sales and the store experience have improved has has that changed the quality of what each of these vendors is willing to offer you are you getting more access to the better and best side of the assortments and more importantly is buying in those higher tier categories from these vendors more competitive with other off-pricers than what you've seen in the past i didn't quite follow the second part of your question the first part is we are we getting more vendors and even higher end or better quality product what was the second part of your question or is it as you get access to the better and best side of the assortments are you finding are the buyers finding those higher tier categories with these vendors more

competitive with other off-pricers I see and I think the answer the first party question is yes we're getting more access to better brands more popular brands not necessarily always higher price point brands and in terms of are they more competitive and I think all of the off-pricers and one of them is already reported that the the opportunities from a supply side standpoint from a close out standpoint are there they're outstanding that There's plenty of product to continue to fuel the fire. And I think we've always been competing to some degree for that next buy. And we have some formidable competition out there. We're helped a little bit right now because of the outsized growth. So I think occasionally we're getting the ability to open up vendors because we're growing more or one of our competitors may not want more product or need more product. So I think there's a number of factors, and we still have plenty of work to be done in front of us to continue to knock on doors and just be persistent with brands that we'd like to bring into the store to the extent that I'm calling vendors from time to time trying to open them up if I can feel.

And then if I could ask a follow-up, as you think beyond this year, which has been kind of remarkable, do you believe the business ultimately settles back into what we think of as a traditional off-price, you know, 3% to 4% algorithm on same-store sales? Or do the ongoing pilot and implementation of the initiatives that you talk about in marketing and merchandising, customer acquisition, do those support confidential above that for another year? or what would need to continue working for the latter to be true?

Michael, it's Michael Hartshorn. Hi, Michael. Clearly, how are you? We're clearly pleased with the current performance and trend, and as Jim's said multiple times, many of the things that we're testing in store, testing in merchandising, and even testing in marketing, they're very early stages. So we think we can certainly grow beyond over-trending today and be able to comp on top of the very strong comps this year. I think from a, is it time to update the long-term algorithm? I think the right time to do that would be, you know, further along in some of the initiatives we have in place.

At this point, we wouldn't update kind of the long-term year-over-year algorithm and hope to beat that long-term algorithm in the short term okay thanks a lot guys congrats again thank you your next question comes from Alex Stratton with Morgan Stanley please state your question perfect thanks so much maybe Jim as you look forward do those initiatives you've spoken to require a structurally higher level of investment to sustain that high comp growth or do believe most of the investment is is already reflected in the current cost

structure and I have one one follow-up this is Michael again with within the cost structure and you can see it in the results in the P&L and from the capital structure clearly we've expanded our unit growth which that takes additional investment, but that's the best investment we can make in the company. Usually that capital pays back in a matter of two to three years. In all the initiatives, the biggest impact you can have is across 2,300 stores. We have very good test and learn capabilities. So the investments we're making, we're first testing in pilot stores, and if it makes sense, it's going to make sense. If it's a capital investment, it's going to make sense through the P&L. So despite the initiatives we have in place, we've been able to leverage store payroll this year. We've been able to leverage SG&A as a whole. You know, we'll continue to test if it works on the total P&L, we'll make the investment. and we've been very happy with how we've been able to manage putting these new initiatives in place and managing our capital and expenses.

Great. I'll leave it there. Thanks.

Your next question comes from Brooke Roach with Goldman Sachs. Please state your question.

Good afternoon, and thank you for taking our question. I had a follow-up on Alex's question, which is that given the success of each of these growth initiatives, are there any areas where you think you should lean in and increase the pace of these investments whether it's marketing or otherwise maybe said another way is there a change in your thinking about the typical level of flow through that we should see per point of comp outperformance versus your guide and maybe I can start that one and Michael and Bill could add if necessary we haven't asked that question you know should we be doing even more could we drive you in more growth and we're pretty pleased with the underlying growth that we have right now and so

demand generation hasn't hasn't been a huge challenge for us with with all of these things working together and and our flow through you know one of the questions when we get ourselves organized to prepare for a call we say alright won't the sales have been really strong what's our flow through and I'm gonna meet those expectations and the answer to that question for the last four or five quarters has been yes so for the time being we're going to continue to work largely within the economic model that we have with the flow-through assumptions that are out there and if I guess I would just signal if there was a point in time in the future where we thought we were going to over invest or over club something betting on the come for future sort of longer-term value, I'd really like to bring that to the market before we just do it and then surprise you at the end of the quarter. So right now, with the exception of some small things here or there that have been subsumed in the growth that we're seeing, we're working within the financial construct of the business that's been in place for years now.

So, yeah, Brooke, I mean, that same you know, 10 to 15 BIPs per 1% of comp model still holds.

Great, thanks so much.

Of course, thank you. And your next question comes from Mark Alschweger with Baird. Please state your question. Thank you, good afternoon.

Maybe first question, just following up again on the margin, maybe a little bit more near-term focus. If my math is correct. I think the implied raise in the back half is a bit more than that 10 to 15 basis points as we look at just how much the earnings went up relative to the comp raise. I guess, is that right? And maybe what are the other factors affecting the flow-through assumptions in the back half?

Aside from better leverage on higher sales, has anything changed in terms of your view on the margin puts and takes for the back half thank you yeah I think that that back half we're we're in line with with the comp raise that we that we have there on the six to seven of four to five comp raise I think we're seeing that you know top-line momentum and few we feel good about what's in place there but our guidance you know reflects some of what we talked about their higher merchandise margin some lower DC costs so it's it's in line okay and then maybe a bigger picture one on the competitive backdrop a number of the large national

chains are leaning harder into price investment this year in the back half of this year reinvesting some of the tariff refunds given the acceleration through the quarter that you cited and the August trend it doesn't seem like that's having an impact. But even so, how are you thinking about protecting the value gap in this environment? And what are your assumptions for ticket growth in the back half and how that might change as you maintain your competitive pricing? Sure. Starting with the overarching premise that we always want to have sort of that pricing umbrella and be underneath mainstream retail and the second piece is what one of the things if you were to retroactively go back through the last four quarters we were very hesitant to pass through a you are increases and so much so that we called out some impact to our earnings when Paris first came to their last year so I think a lot of other retailers took a different position trying to pass that along and maybe now sort of reversing course you know we've tried to maintain a little bit more stability and you know in today's environment today's inflationary economy we absolutely want to have the best values in our store and if that were that work if we were to see something where we didn't have that price umbrella under mainstream retail would make a change but I think we're we are still safe where we are now to the back half of the year and you'll likely see some very modest AUR increases sort of at the same sort of levels that we're seeing now um you know low single digit um and you know we we we really want to be there for a a customer that's battling higher gas prices and all the other inflation um pressures that they're they have in their life so um it's an important question it's a strategic question but I'm liking sort of the consistency of our pricing strategy right now and I think as it stands if we were to do some competitive price shopping we would look very very competitive thank you of course your

next question comes from Ike Burchow with Wells Fargo please state your question hey let me add my congrats was wondering if we could dig into the back half margins. Just curious if you can maybe let us know what's going on in the gross margin within your plan for the third quarter and the fourth quarter. And then specifically, I know you call that freight as a 10 bips headwind in the second quarter. Does that worsen in the back half? What kind of what have you seen with contracts over the last, you know, since the last time we heard from you? Just kind of curious how to think about the freight line within that. Thanks.

Yeah, certainly you saw that. You heard the specifics on Q3. What will obviously provide more specifics on Q4 margin when we report the Q3 results but we do anticipate merchandise margin will remain a tailwind and some benefit in DC costs I think similar to Q3 we are projecting domestic freight to D leverage due to higher fuel costs and as you can surmise that that raised sales guidance in Q4 would imply some even margin improvement verse last year so on fuel you know we don't hedge fuel costs the biggest component of our of our freight is is fuel so if things are going to change materially on the fuel side from where they are today that that would have an impact but we do have embedded in our guidance right now higher fuel is that impact more

detrimental in the third quarter and fourth quarter than it was in the second quarter I think it kind of depends what happens with with the fuel prices all right and you we have our best estimate from where they are now but but again it kind of depends on where where it goes from here got it all right thank you thank you thank you your next question comes from Jay soul with UBS please get your question great thank you so much um Kim I'm curious about trying to understand the content a little bit better because it sounds like transactions was a big driver which presumably means traffic but a lot of the key initiatives like getting better brands holding more inventory the store those aren't really traffic drivers whereas like marketing which would be a traffic driver or better in-store execution could drive transactions, but those sort of sound secondary. Are we sort of missing the point that maybe the marketing is a bigger driver of traffic and some of the merchandise initiatives have yet to really, you know, show the results that you're expecting that you're starting to see, and maybe that's why you see, you know, only the beginning of the improvement at ROSC, you know, being able to continue for longer term? That's a great question, Jay. and hopefully hopefully we're we're being clear I think I think all three pieces work together the the part we don't have great we have a great ability to parse out is if we see an increase in transactions there are probably times when it's a customer that maybe was going to shop anyway and wasn't always going to buy but now the assortment is great or the store looks better and now they get converted and we can't we can't connect that last piece of the arithmetic because we don't have traffic counters but I if you think about what's driving the traffic I mean the logical place to go is great creative a great way of spending the media and you know we're continuing to tweak our media mix and capturing sort of a whole cadre of customers new and customers that use a shop with us and perhaps encouraging existing customers to come back more now there is a thesis and part of this is true I'm sure that there's an existing customer that had shopped with us with some periodic frequency, and now she comes in and she feels great about the assortment and the store looks better and she doesn't wait in line as long. So now she's just shopping more frequently. I can't fully or we can't fully attribute that to marketing efforts. It might just be a better experience that she is now shopping more frequently and potentially telling others so we try to split it into three handy buckets meaning marketing drives sales and the store experience and of course the assortment converts sorry marketing drives traffic and the assortment and store experience converts that traffic into buyers but it's not it's not quite that clearly delineated between the different pieces so I'm not sure I've answered your question but what we are absolutely challenging marketing to continue to fill top of file customers that's working we're challenging the merchants to bring the best assortment continue to add new vendors that seems to be working and the store experience has absolutely improved not only so of anecdotally when we shop the stores but we have metrics and customer survey instruments that are telling us that so all of them work together and I we we continue to call it sort of this flywheel or the virtual cycle and you know what we're going to continue to try to roll that forward that's helpful Jim oh yes do one more if that's okay just kind of want to help understanding how you're thinking about brand relevance because you know we all saw what happened at Boot Barn and how much brand relevance increased over a multi-year period. But can you just tie the importance of improving brand relevance at Ross to getting better brands in the store? How much are you making sort of that connection where it's not just about getting more consumers or a higher-income consumer, but it's also about selling Ross to the vendors who are going to give you the products that you really want? There's a very astute connection of two dots there, Jay. But we want Ross and DBs to both resonate with consumers in their own right as brands. And the underlying proposition of both of them right now are very, very strong value orientation. And we don't want to lose that. We do think we can be more than that. And that's what we're trying to do. So you can see it in, it's no secret, unfortunately, but you can see it in our Instagram posts, right? We will swing from product and value stories and posts, and then we'll push towards sort of more storytelling and creative stretches. And that's intentional, and it seems to be working. Okay, thank you so much. Of course, thanks, Jay.

And your next question comes from Dana Telsey with Telsey Advisory Group. Please state your question.

Hey, everyone. Congratulations. It's so nice to see the progress. As you think about the categories that you called out, Jim, cosmetics and home being strong drivers, last quarter I think it was ladies and cosmetics. So cosmetics has been consistent. Any update on apparel or on ladies and how that performed? And then the uptick in the new store openings. any in the Northeast, or where do you see them going, where do you see them opening, and is the size at all different, and does the acceleration this year in new store openings, does it suggest that we could see an accelerated pace of new store openings going forward in future years? Thank you.

Okay, I'll start and then Michael will do the stores piece. On the category growth, yes, let me just start off with the ones that you called out. Cosmetics was wrong. Michael Kajunziha and Stephanie Levitt, that team, Stephanie Levitt's team has done a really nice job quarter after quarter of growing that business. The home business was very strong in this quarter. And to sort of play back the tape, You know, that was a business that, while growing, was growing slightly less than company average and is now – we have kind of – the home business is outpacing company average. So we're doing particular strength in both Ross and DDs and even really unique strength in sort of the more fashionable parts of home, you know, decorative home and housewares. and with that growth in mid-teens, so hats off to Gurmeet and his team. From a ladies' perspective, the ladies business continues to be very strong. We didn't call it out, so it's not one of the top two, but you often kind of remind us of how that was part of the brand strategy, et cetera. And in Q1, it was comp enhancing. In Q2, it's slightly below the company average, but pretty much in line. we've seen some nice growth in the younger parts of that business particularly juniors so that part of the strategy continues to be strong and but as I stare at a sheet of paper in front of me that admittedly I recognize you can't all see it's just really encouraging to look down a column of numbers and see every single major merchandise category comping positive Dana, on real estate, the team has done just an outstanding job in really growing our pipeline and the intent is to grow that so that we have year over year, 5% unit growth

is what's in our model. This year we had, you know, these five stores that we added were stores that were teetering on, you know, could we open them this year, get through the negotiations and construction, or should we open them in spring of next year? And the team, again, did a good job, and they're ready to go this year. So that's really the increase. And in terms of where we're going, clearly you see us entering the Northeast. We've been very happy with that performance, new store performance this year. We had planned the year around 70% to 75%. We have, you know, half of the in place this year, and they're running ahead of that. So we'll see how the fall openings do. But we're very excited about growth, growth in the Northeast. You also mentioned store size. We really haven't changed our store size, but, you know, it's on a side-by-side basis. Sometimes we'll take on more real estate, less than the average.

But we're really excited about our expansion opportunities. thank you your next question comes from Adrian Yee with Barclays please get your question great thank you very much and I'll add my congratulations really great quarter my I guess my first question is are you seeing any shift in the inventory availability from closeouts at retail versus wholesale partners and vendors and then secondarily if you can talk about any categories I mean

obviously homes been great cosmetics beauty etc are you seeing any categories that are becoming more competitive or that where you think you are under penetrated and you can be more competitive in the landscape thank you very much sure no meaningful shifts and to the first part of your question the the closed-out opportunities are very strong and what we we do see categories where we think we can grow or we think we are under penetrated relative to where we should be or work relative to where some of our off-price competitors are so there are certain places we're pressing for more growth I'd rather not consider divulged specifically what they are but that is something that we look at all time which is sort of you know what's our percentage of business by by category and how do we think that compares to some of the other folks out there and in terms of competing for goods there's definitely a piece of that in off price however their availability is strong and there's a lot of goods being canceled so there's you know as you see some of the softness in mainstream retail right now you know there's a lot of goods becoming available and we expect that to continue and so you know we'll get our fair share competitors will get their fair share and you know it off price at the end of the day will probably continue to be a winning sector and we hope to be you leading that sector.

Great. And then my follow-on question is a little bit of a higher level question. As you think about how sort of AI and agentic search is going to be much more directed, directing the consumer to where they need to purchase, how do you think that impacts off-price over time?

Look, AI is everywhere. It's in every conference room and every boardroom across the country, so it's going to be important to us. Of course, way before I got here, Michael and the IT team had already started investing in sort of a foundational data element that we need to rely on to integrate AI. And then as we go function by function across the business, you know we we don't look at any new process or any sort of system application without figuring out a way to enhance it further with with AI so that could be analytics or whatever we're doing planning and allocation and of course the software developers are using it every day and what it's unlikely that will do and we've seen other companies do this is stand up an entire separate functional area within the organization that only does that we'd much rather have it integrated within how we operate the business so it'll be a it'll be an enhancer to how we operate and I'm sure we'll get questions on it in the future I can tell you I'm personally very bullish on AI but I also see tremendous opportunity for us to just execute on sort of basic blocking and tackling and continuing to improve the customer experience, improve our assortment, and continue to drive sales growth. And AI could just be icing on the cake on top of that.

Great. Thank you very much. Rest of luck.

Thank you. Our next question comes from Christina Katai with Deutsche Bank. Please state your question.

Hi. Good afternoon, and congratulations on a really excellent quarter. So you described the new customer cohort as having, I believe you said the word, exceptionally strong report card. Can you talk about the metric or the various metrics that have exceeded your expectations the most? And then secondly, Jim, when you were discussing still being in the early innings, I think you said some initiatives have been implemented chain-wide, some in certain stores, some in certain categories.

So when we sort of take a step back, like what percentage of stores are currently opening under this new playbook? if you could just sort of frame that up for us in terms of opportunity all right now I'll try to help clarify both of those it sounds like maybe I wasn't crystal clear on either on the first piece I think what I said or at least what I was trying to say is the performance indicators from a customer standpoint are extremely strong and this what I mean by that is the dimensions perhaps or there's four of them one is are you seeing customer capture from new customers people that have essentially never shopped Ross before yes we are we're also seeing shoppers that have shop with us in the past and perhaps have gone away and we haven't heard from them in two or three years and they've returned so we've seen that and we've seen an increase year-over-year versus last year in that group then we can measure the frequency of our existing shoppers and we're seeing them shop more frequently and then we can see our basket go up so they're all spending more money so that's the sort of report card rounding out that part of your question the new customers look and feel very similar to our current customers it's a diversity of age groups of income levels of ethnicities it's kind of a mirror image of the customers that are in the store already in terms of the initiatives that I suppose that was more of a conceptual response but if you think of what we've got a list and we can break it into three buckets merchandising stores and marketing but there are others to rate and HR a supply chain there's a million things going on and some things we've tried and they've worked Michael a few minutes ago mentioned the test and learn capability that the company has so they'll be something that will say occasionally we'll say this is a great idea let's just roll it out oftentimes we'll say this is an idea that might work let's put it in 200 stores and that team within this test and learn is essentially a department here will of extremely talented and smart people will come back four weeks six weeks eight weeks later this is what we're seeing and if we feel good about the return we'll expand it if it's a no-brainer we'll put it in all stores if we want to learn a little bit more we'll expand it to half the chains so if you it would be it would be hard for us to say go to store 12.9 you'll see everything because every store is a little different they're different sizes that are in different types of shopping centers, et cetera. So all the initiatives that we're rolling out kind of behave a little bit differently depending on the store, the store location, the merchandise category that we might be talking about if we're doing something from a merchandising standpoint. So it's not easy to say, here's the quote-unquote new store prototype and has every bell and whistle, and you'll see all the new marketing and all the new brands, it's not like that. It's a series of things that are all ramping up over time.

Okay, well, that was a great caller. Thank you so much. Best of luck.

You're welcome.

Your next question comes from Anisha Sherman with Bernstein. Please take your question.

Thank you so much. So I want to ask about your strategy of increasing in-store inventories. We're seeing some signs of a weaker U.S. consumer across the board. How do you think about the risk to a higher inventory strategy if we do see some softening in the consumer trend and perhaps if you start to see a slowdown in turns? And then a quick follow-up, Jim, on your comment just now around new customers being very similar demographically as your current ones. When you look at customer surveys or performance by store, do you believe there's some share shifts going on within off-price or do you believe these new customers are entering the off-price space from mainstream retail? Thank you.

Anisha, on inventory, you are right. I mean, we did carry store-level inventory, higher store-level inventory during the quarter, partly to support the stronger consumer demand. Despite that higher level of inventory, our in-store terms remained very strong. and at the same time we delivered higher merchandise margins with the inventory levels we our clearance levels have historically been low they remained low for us I mean the key for us is to maintain flexibility in the open to buy and we'll always be positioned to take advantage of closeouts that's in the marketplace or if there's a pullback we'll have some flexibility to adjust the inventory levels yeah I agree with Michael on that point and we've seen

merchandise margin increase in each of the last few quarters so I don't I don't really describe any real risk to our inventory position right now from a share shift within off price I suppose there's two ways to respond the first way and trying to not be immodest at all just mathematically over the last four quarters we've grown stronger than each of the other two players so mathematically we've captured more steps so we are of the off price retail market we're a bigger piece and we're a year focus without thrown them in terms of is our business uniquely impacting one or both of the other off-pricers I don't think we can comment on that I they're both very formidable companies that both extremely well run we're all competing against each other but we're also capturing share from a whole bunch of other places in the retail industry so So to some degree, we want off rates to win, and we just want to be a slightly bigger winner. So I couldn't comment on whether we're specifically impacting either of the two players, and one of which is much bigger than us and does a truly world-class job. So I'm not terribly worried about that.

Okay. Thank you so much.

Of course. Your next question comes from Mourney Shapiro with Retail Tracker. please to your question.

Okay, guys, right in under the wire, and congratulations. So I have a couple of quick ones. I've been very impressed with your Instagram, by the way, and I think it's a lot of fun, and it's young. Do you have any data showing that it is driving in the younger consumer? I mean, I think we could assume it, but I'm curious if you have any data. And are you going to increase your spend in marketing in the back half an inch 27?

On the data front, as you can imagine, we are constantly pouring through data. We have a pretty strong indication that our marketing efforts, both the creative and how we mix the media, are driving traffic, including younger customers. I sometimes pause because I think people often draw too direct of a line between you run a post or post a reel, and the next day sales goes up. and I think we're trying to build a bridge over time. In terms of marketing spend, as our business continues to grow, we plan our marketing as a rate of sales, so we'll get some increased spend in the back half because we had planned the business to be bigger than it was last year in the back half. In terms of rate of sales, we might see some slight escalation there. But, you know, we'll see how it goes.

Great. And then just one follow-up. You mentioned FIFA. We're now back to school. I'm curious if the team is leaning a little bit more or plans to lean a little bit more into these holidays and events. It seems that that's when the shopper is coming out across all income levels, but definitely more so in the last couple of years. And I'm curious, it's not just, you know, back to school, but Halloween, Valentine's Day, graduation, Mother's Day, you know, all the events during the year. Is there a change of thinking there?

I guess I agree. The concept of event-driven in-store selling, I think, has existed now for a couple of years. I think we have done a pretty good job. I know each of the chief merchants are trying to further hone that ability. and I wouldn't call it a a sharp change in our strategy or direction and maybe just you know doubling down a little bit on each of the events but we've had the good fortune though I was just looking in preparation for this call it weekly comps and they're pretty consistent it's not like we're comping massively around an event and then falling off and then capturing you know catching it all back up at the next event. You know, it'll be interesting with a later, potentially a later back-to-school season. People will call that out. Labor Day has shifted if back-to-school extends longer or comes later, but I think we've somewhat strongly hinted that our business right now is pretty strong also.

So you're not seeing kind of the ups and downs between the holidays that some other retailers might see? Correct. Or not to the extent that you need to call it out I guess.

I'll tell you this I looked at the last four weeks in July and they were almost exactly the same number for four weeks in a row there's not a lot of massive events in July maybe at the end of the class we started getting back to school but we are not we are not seeing comps build massively around you know Mother's Day, Father's Day, Father's Day shifted but and then fall back to low single digits and then come back up to mid-teens. It's just not operating like that. It's been, on a year-over-year, while the volume might change during an event week, the year-over-year comp that we're seeing has been pretty darn consistent each week.

Well, that's great. Stable and boring is a good thing. Congratulations. Best of luck for the rest of back to school.

Thank you very much.

And our final question for the day comes from Bob Durbel with BTIG. Please take your question.

Hi, thanks for taking the question. I guess two questions, if I could. I guess the first one is, when you think about the new vendor ads and what's happening in the business, is your mix of good, better, best shifting dramatically over historical years of the company?

I guess the second question, I'd just love to hear your take on the Deedee's business you know where you feel that is and and the opportunity that you're seeing especially as it relates to the performance that though you know Ross division thanks the quick answer on the price point good better batches where we're not seeing a massive shift there in fact we're sort of planfully trying to maintain you know that good price point because that's that's kind of our bread and butter where we recognize that the environment that we're in right now a lot of retailers are under pressure a lot of discount retailers are under pressure and it it would sort of be a foolhardy strategy to take this moment in time to elevate the assortment and and bring our price points up in a meaningful way and the DD's is is a is in a great spot I mean we talked about good better best within Ross DD sort of tucks in beneath that those price points and you know that they we don't split them out specifically but they had a very strong quarter as well on a one-year basis not quite as strong as Ross but on a two-year basis almost exactly in line with Ross so and Karen and Ken Margulies and those folks are doing a really good job running that business so we absolutely want new and better brand national brands at all price points sometimes they they they shade higher but not all the time and we're we're very very cognizant to make sure that we're not overshooting our customer particularly in the current environment thank you thank you thank you I'll now hand it over to Jim Conroy for closing remarks very good well thank you everyone for joining us today and we look forward to speaking with you on our next earnings call take care thank you and this concludes today's

conference all parties may disconnect have a good day