Ross Stores Delivers EPS Beat But Issues Cautious Outlook Amid Volatile Trends

Ross Stores (ROST) reported its fourth-quarter 2024 earnings, delivering an EPS of $1.79, which surpassed analyst expectations of $1.66 but fell slightly from the $1.82 EPS reported last year. Revenue came in at $5.91 billion, narrowly missing the $5.96 billion consensus estimate, marking a 1.8 percent year-over-year decline. Despite the revenue miss, comparable sales increased 3 percent, exceeding expectations of 2.46 percent, driven by higher customer traffic and increased units per transaction. However, a cautious first-quarter and full-year 2025 outlook led to a neutral reaction in the stock, with shares largely flat following the announcement.

Key Metrics and Operational Performance

While top-line revenue fell short, Ross Stores managed to deliver stronger-than-expected operating margins, reaching 12.4 percent for the quarter, well ahead of the 11.5 percent estimate. The earnings beat was partly attributed to better cost controls, though gross margin contracted 80 basis points to 26.5 percent, missing consensus expectations of 26.8 percent. Merchandise margin declined by 85 basis points, while occupancy costs pressured results with a 45-basis-point drag.

On the inventory front, Ross Stores reported merchandise inventories of $2.44 billion, reflecting a 12 percent increase year-over-year. This suggests that the company has strong product availability, particularly as it benefits from closeout buying opportunities amid retail sector volatility.

The company’s SG&A expenses leveraged favorably, coming in at 14.2 percent of sales, better than the expected 15.3 percent, demonstrating effective expense management. As a result, operating margins remained flat year-over-year, despite a more challenging retail environment.

Outlook and Guidance Raises Some Concerns

While the fourth-quarter earnings beat was a positive surprise, management issued a cautious outlook for the first quarter and fiscal year 2025, citing ongoing macroeconomic headwinds and softer consumer spending trends. For the first quarter of 2025, Ross Stores guided:

- EPS of $1.33 to $1.47, below the $1.52 consensus estimate

- Comparable sales in the range of -3 percent to 0 percent, significantly weaker than expectations of +2.4 percent

- Operating margin guidance of 11.4 percent to 12.1 percent, below the 12.2 percent reported last year

For the full year 2025, the company expects:

- Revenue growth of 1 percent to 5 percent, compared to prior consensus expectations of 6 percent growth

- Comparable sales growth between -1 percent and +2 percent, below prior estimates of +3 percent

- EPS in the range of $5.95 to $6.55, well below the $6.69 analyst consensus estimate

The weaker-than-expected guidance reflects sales trends slowing into the end of the fourth quarter and into early first quarter 2025, which management attributed to unseasonable weather and broader macroeconomic and geopolitical uncertainty. While trends showed improvement throughout February, consumer spending remains volatile, particularly among lower-income shoppers.

Key Drivers Behind the Earnings Results

1. Trade-down beneficiary – Analysts at Bank of America reiterated a buy rating on Ross Stores, noting that the company is well-positioned to benefit from trade-down dynamics, as consumers look for value in a challenging economic environment. Strong merchandise availability also supports Ross’s ability to capitalize on discounted closeout inventory.

2. Stronger margins despite sales shortfall – While sales were slightly below expectations, cost controls and SG&A leverage helped offset gross margin pressure, resulting in an operating margin beat.

3. Inventory growth – The 12 percent increase in inventory levels suggests that Ross has ample merchandise availability, allowing it to take advantage of off-price buying opportunities.

4. Cautious consumer trends – Management noted that spending slowed in February but improved as the month progressed, reflecting a hesitant consumer environment.

5. New leadership focus – CEO Jim Conroy, who recently took over the role, indicated that no major changes to the business model are planned but highlighted enhancing the in-store experience and marketing efforts as key long-term priorities.

Stock Performance and Market Reaction

Ross Stores' stock reaction remained muted following the earnings release, with shares largely flat. However, the stock has underperformed the S&P 500 in 2025, with a decline of 9.6 percent year-to-date, compared to the broader market’s 0.5 percent decline.

Some analysts maintained their bullish stance on the stock, believing Ross will benefit from a trade-down consumer environment. Others, however, noted that lower-income consumers may be facing increased financial pressure, which could weigh on discretionary spending trends.

Final Thoughts: A Mixed Bag for Ross Stores

Ross Stores delivered an EPS beat and stronger-than-expected comparable sales growth, but top-line revenue and gross margins fell slightly short of expectations. Cost discipline and better-than-expected operating margins helped offset some of the softness, but cautious guidance for the first quarter and full-year 2025 raises concerns about near-term headwinds.

Despite macro uncertainties, the company remains well-positioned in the off-price retail space, with strong inventory levels and continued demand from value-seeking consumers. However, the weaker-than-expected full-year 2025 guidance suggests management is preparing for a more challenging operating environment, which may limit near-term upside for the stock. Investors will be watching closely for signs of a recovery in spending trends and improvement in sales momentum throughout the first quarter and beyond.