Ross Stores: Blowout Comps Meet a Full Multiple

Ross Stores: Blowout Comps Meet a Full Multiple

Ross Stores (NASDAQ: ROST) gave the market exactly the quarter it has been trained to expect, and Friday morning the market briefly paid up before thinking twice. Shares rose as much as 9% in premarket trading after Thursday night's fiscal second-quarter report and opened above $243, then faded to roughly $235 by late morning, up less than 3% for the day. The fade matters more than the headline. Even after the gap, Ross is still down about 4% from five sessions ago, and the stock sits only about 9% below its 52-week high after a year in which it has already returned roughly 60%. The market is not chasing this quarter with conviction; it is selling some of the pop into strength.

The underlying number is as good as off-price gets. Comparable store sales rose 10% in the quarter ended August 1, and Ross was unambiguous about the driver: customer traffic, not higher prices. For a discount retailer that is the cleanest possible demand signal. Traffic means budget-stretched shoppers are choosing to spend their discretionary dollars inside a Ross store, rather than Ross dragging them in with markdowns. Total sales rose 13% to about $6.3 billion, on top of a first half in which sales grew 17% to $12.3 billion. The broad consumer is not in a spending boom, and the rest of the group is not following with the same force — TJX is roughly flat and Macy's is up about 1% on the read-through — but the deepest discounter is printing double-digit comps. That is the trade-down trade working exactly as the model promises.

The asterisk is on the profit number, not the sales number. Ross reported $2.66 of second-quarter earnings per share, up from $1.56 a year ago and far above first-half guidance that called for only $1.85 to $1.93. But roughly $0.60 of that per-share result was a one-time IEEPA tariff refund, cash the government returned for duties Ross had already paid. Strip it out and the quarter still beat the guidance midpoint by about $0.17 — a solid if unspectacular 9% beat rather than the 40% blowout the headline spread implies. Reported operating margin expanded 610 basis points, but 405 of those points were the refund benefit; reported gross margin expanded 625 basis points, similarly flattered. The company is running its stores well; the question is which number the market used to justify an opening gap of nearly 7%.

That brings up the second caveat: the double-digit phase is supposed to end. Ross raised its full-year outlook, but the company itself guides second-half comparable sales back to roughly 4% to 7%. The 10% print may be the peak of this comp cycle, not the new run-rate. TJX, reporting a day earlier, told the same story: consolidated comps rose 4% in its fiscal second quarter, and the company guided the third quarter to just 2% to 3%. When the two best operators in the business both step their forward comps down by roughly half, an 8% pop across the group deserves scrutiny rather than automatic enthusiasm.

The contrast between the two off-price giants is instructive. TJX also beat and raised its full-year outlook, and its stock still fell about 4% in premarket trading, as much as 6% in early trading, because its third-quarter profit guidance came in below expectations. Inside the beat the picture was mixed: the core U.S. Marmaxx business managed just 1% comparable growth while HomeGoods, Canada and international all hit 6% to 7%. Ross's 10%, by contrast, came from its core U.S. off-price apparel franchise. The read-through is that trade-down demand is real but concentrated — the deepest discounter is capturing it, and the market is punishing the operator that merely meets rather than crushes.

Macy's, the third name nudging higher on the group's coattails, is the least informative part of the reaction. It does not report its fiscal second quarter until September 10, so Friday's gain is sympathy, not evidence. Its first quarter showed comparable sales up 3% — the fourth straight quarter of gains and the best first quarter in four years — with per-share earnings of $0.13 against the roughly $0.02 analysts expected. But those are full-price department store numbers, achieved amid an ongoing store-closure transformation and promotional pressure. A 3% comp at Macy's is not the same animal as a 10% comp at Ross; its rally on read-through says more about the sector trade than about its fundamentals, and at roughly $23 with a trailing P/E near 9 and a 3.3% dividend yield, the market prices it as a turnaround, not a growth story.

So the real question is whether the market's new price for Ross still leaves the buyer a good hand. At roughly $235, the stock trades about 27 times the midpoint of the raised current-year guidance of $8.61 to $8.77 per share — a range that lands about 12% above the roughly $7.78 full-year consensus in place before the print — and about 28 times trailing earnings, 18.5 times trailing EBITDA and three times sales, with a dividend yield under 1%. That is a modest premium to TJX, which trades near $140 and roughly 26 times the midpoint of its own raised fiscal-year guidance. Ross has earned a premium for decades as one of the best-run retailers in America: roughly $4.3 billion of cash, about $2.8 billion of trailing free cash flow that grew 66% year over year, and 24 straight years of dividend increases. None of that is in dispute.

What is in dispute is the size of that premium after a 30%-plus year and a gap-up that has already faded by the time most investors could react. The multiple now embeds the 10% comp as if it were the run-rate, when management's own guidance says the run-rate is roughly half that, and the tariff refunds flattering both the quarter and the raised guide will not recur. A stock can be cheap enough to ignore its risks; the question here is the reverse — whether a great quarter is now priced well enough to ignore its upside. The disciplined response is a Hold, not a chase. A pullback that brings the multiple back toward the mid-20s, or a second-half quarter that proves comparable sales can hold in the high single digits while margins still expand once the refunds clear, would make the risk/reward interesting again. Until then, the quarter deserved its headlines; the stock no longer needs the help.