Navigating Trade Policy Risks: Ross Stores' Guidance Revisions Highlight Off-Price Retail's Resilience Opportunity

The retail sector is at a crossroads, with trade policy volatility and macroeconomic uncertainty testing the mettle of even the most agile players. Ross Stores (ROST), a bellwether for off-price retailers, recently revised its Q2 2025 guidance and withdrew its full-year outlook—a move that underscores both sector-wide risks and hidden opportunities. For investors, the calculus is clear: while near-term headwinds like tariffs on Chinese imports threaten margins, the current undervaluation of trade-sensitive retailers could position them for a rebound once policy clarity emerges. Here’s why Ross Stores—and its peers—deserve a closer look.

The Tariff Toll on Margins: Ross’s Reality Check

Ross Stores’ Q1 2025 earnings revealed a stark reality: tariffs are squeezing profitability. With over half its merchandise sourced from China, the company now faces an estimated $0.11–$0.16 per share hit from tariffs in Q2 alone. This pressure forced management to narrow EPS guidance to $1.40–$1.55, down from $1.59 in the prior year.

The slowdown in comparable store sales—flat in Q1 versus prior-year growth—adds urgency. Yet Ross isn’t abandoning its financial discipline: it repurchased $263 million in shares during Q1, maintaining its $2.1 billion two-year buyback authorization. This signals confidence in its long-term model, even as short-term visibility dims.

Why the Off-Price Sector Is a Bargain Now

The broader off-price retail sector—dominated by Ross and TJX Companies (TJX)—faces similar tariff pressures. However, their business models are inherently built to thrive in volatile environments. Off-price retailers like Ross benefit from discounted inventory, which can offset rising input costs, provided demand holds.

Consider the data:
- Tariff Exposure Metrics: Ross’s reliance on Chinese imports (50%+) mirrors TJX’s 45% exposure. Both are aggressively diversifying sourcing, with Vietnam and Mexico gaining traction.
- Valuation Discount: ROST trades at 13x forward earnings, below its five-year average of 16x. TJX trades at 12x, also below historical norms.

The sector’s current discount reflects not just tariff fears but also broader macroeconomic anxiety. Yet with consumer spending on essentials proving resilient—even as discretionary spending slows—off-price retailers’ value-driven proposition could attract shoppers in a cost-conscious environment.

Macroeconomic Tailwinds to Watch

While trade policy remains the wildcard, two factors could catalyze a rebound:
1. Consumer Resilience: Despite inflation, U.S. consumers are prioritizing discounts. Off-price retailers’ Q1 sales growth (7% for Ross) outpaced traditional retailers, suggesting stickiness in their customer base.
2. Policy Clarity: A potential Biden administration pivot on China tariffs—or a Republican win that rethinks trade strategy—could reduce uncertainty. Either outcome could alleviate margin pressures.

Why Now Is the Time to Act

The key takeaway: Ross Stores and its peers are pricing in worst-case scenarios. For investors willing to take a medium-term view, the current undervaluation offers a compelling entry point.

• Risk/Reward Trade: The downside is limited for ROST, trading near multi-year lows. Upside potential emerges if tariffs ease or the off-price model proves more recession-resistant than feared.
• Balance Sheet Strength: Ross’s $3.78 billion in cash (despite recent declines) provides a buffer for inventory management and opportunistic purchases.

Final Call: Buy the Dip, Position for Clarity

Ross Stores’ guidance revision isn’t just a cautionary tale—it’s a buying opportunity. The off-price sector’s valuation discount now outweighs near-term risks, especially for investors who believe trade policy will stabilize within 12–18 months.

Focus on companies like Ross that:
- Maintain robust liquidity and shareholder returns.
- Diversify supply chains to mitigate tariff exposure.
- Benefit from structural shifts toward value-driven retail.

The playbook is clear: buy dips in ROST and TJX now, and hold for the policy clarity that will unlock their full potential.

This article is for informational purposes only and does not constitute financial advice. Always conduct your own research or consult a professional before making investment decisions.