Ross Stores’ Earnings Call Contradictions: Merchandise Margin Drivers, Customer Growth Claims Clash

Date of Call: Mar 3, 2026

Financials Results

• Revenue: Q4: $6.6B, up 12% YOY; FY: $22.8B, a record, up 8% YOY
• EPS: Q4: $2.00 per share, up 21% YOY excluding prior year facility sale benefit; FY: $6.61 per share, up from $6.32 YOY
• Operating Margin: Q4: 12.3% compared to 12.4% last year, which included a 105 bps benefit from a facility sale; FY: 11.9%

Guidance:

• Q1 2026 comp sales expected up 7% to 8%; EPS expected $1.60 to $1.67.
• Q1 operating margin expected 11.8% to 12.1% compared to 12.2% last year.
• FY 2026 comp sales expected up 3% to 4%; EPS expected $7.02 to $7.36 compared to $6.61 FY2025.
• FY operating margin expected 12.0% to 12.3% compared to 11.9% FY2025.
• FY sales projected up 5% to 7%.
• Plan to open 110 new stores (85 Ross, 25 DeeDee's), a 5% growth.

Business Commentary:

Sales and Earnings Growth:

• Ross Stores reported total sales of $6.6 billion for the fourth quarter, a 12% increase, and comparable store sales grew 9%.
• The growth was driven by strong collaboration across the company, effective marketing campaigns, and successful in-store initiatives.

Inventory and Store Expansion:

• Consolidated inventories were up 8%, with pack-away representing 37% of total inventory.
• The company added 80 new Ross Dress for Less stores and 10 DeeDees discount stores, expanding into new markets like New York and Puerto Rico.

Operating Margin and Cost Efficiency:

• Fourth quarter operating margin was 12.3%, slightly lower than the previous year's 12.4%, but excluding a prior-year benefit, it increased by 95 basis points.
• Cost efficiency improvements were noted in cost of goods sold, occupancy, distribution, and merchandise margin, partially offset by higher buying costs.

Marketing and Customer Engagement:

• New marketing campaigns contributed to higher customer engagement and increased customer traffic.
• The company is encouraged by higher levels of customer awareness and engagement, which are expected to support continued growth.

First Quarter and Full-Year Guidance:

• For the first quarter, comparable store sales are projected to increase 7% to 8%, with total sales up 10% to 12%.
• Full-year guidance anticipates same-store sales to be up 3% to 4% and earnings per share to be $7.02 to $7.36, reflecting planned store expansion and supply chain investments.

Sentiment Analysis:

Overall Tone: Positive

• "business momentum accelerated further in the fourth quarter, with both sales and earnings significantly surpassing our expectations" and "extremely grateful for the support and dedication of the entire team" and "optimistic about the strength of our business and the initiatives planned for 2026".

Q&A:

• Question from Michael Hartshorn (Ross Stores): Could you elaborate on the inflection to 8% traffic-led comps in the back half of the year? How would you bridge the more than 600 basis points of comp improvement relative to low single digits over the last four quarters? And on the 7% to 8% comp guide, could you elaborate on the further improvement you saw to start the quarter?
  Response: The comp improvement was broad-based across all merchandise categories and regions, driven by strength in ladies, men's, cosmetics, shoes, and sequential improvement in home and toys. The Q1 comp guide reflects positive momentum from Q4 and strong early-quarter performance, but remains conservative.

• Question from Tracy Cogan (Citigroup): What drove the merchandise margin improvement in Q4 and what are you expecting in F26?
  Response: Margin improvement was driven mostly by better buying and merchant decisions on value. For FY26, improvement is mainly expected from better buying and some recapture of tariff pressure early in the year.

• Question from Tracy Cogan (Citigroup): Can you size the headwinds from higher incentive comp and timing of pack-away on the flow-through in Q1?
  Response: The deleverage in Q1 EBIT is driven by three factors: not yet lapping a distribution center opening (biggest impact), timing of pack-away expenses, and higher incentive comp from a disappointing Q1 last year. These are 'pretty evenly split'.

• Question from Julianne (Wells Fargo): What are the key factors driving the acceleration in the ladies business and what's your outlook for the category?
  Response: Acceleration is due to a brand strategy reset two years ago, focusing on branded bargains across price points, particularly in juniors. Outlook is for continued strength, especially in the first half of 2026.

• Question from Chuck Grom (Gordon Haskett): How will you evolve the marketing strategy in 2026 and do you expect marketing expenses as a percentage of sales to increase?
  Response: The new marketing campaigns have been successful. Marketing spend as a rate of sales has not changed and is not planned to increase significantly; it is seen as a potential future lever but not a current need as demand generation is strong.

• Question from Chuck Grom (Gordon Haskett): What improvements in the store experience have worked and what's left on the opportunity set?
  Response: Targeted payroll investments improved store recovery and register throughput. Self-checkout pilots have shown positive results and will be expanded. The focus is on building on these learnings without major new investments.

• Question from Brooke Roach (Goldman Sachs): Are you seeing shifts in the age or household income demographic of your customer base with the higher traffic?
  Response: Customer count growth is encouraging, but data by income and age is complex. Growth is broad-based across demographics, including younger customers (18-34), with strength in juniors and young men's business.

• Question from Brooke Roach (Goldman Sachs): What is the latest view on the earnings algorithm and can you return to a 14% operating margin over time?
  Response: The algorithm is unchanged: ~5% new store growth, ~70-75% new store productivity, EBIT margin leverage of 3-4%, leading to ~8-10% long-term earnings growth. There is no structural barrier to higher margins.

• Question from Michael Binetti (Evercore): Can you walk through the Q1 margin compression and comment on the long-term margin expansion guidance?
  Response: Q1 margin compression is due to specific items: not lapping a distribution center opening (biggest impact), pack-away expense timing, and a lower incentive comp base from last year. The algorithm for comp-to-margin flow-through (10-15 bps per comp point) remains unchanged.

• Question from Michael Binetti (Evercore): Could you expand on the higher new store productivity you're seeing?
  Response: Higher productivity is seen across regions, not just new markets. It reflects more aggressive execution in new stores and operational improvements in existing stores.

• Question from Michael Binetti (Evercore): How is AUR trending and can you quantify new vs. maintenance CapEx in the FY26 guide?
  Response: AUR increased modestly in Q4, with basket growth being the main driver. On CapEx, roughly a third is allocated to each distribution center and new stores, 25% to store maintenance, and the rest to technology and merchandising tools.

• Question from Dana Telsey (Telsey Group): What gives you confidence in expanding DeeDee's openings, and what is the cadence and strategy for DDs?
  Response: Confidence comes from the underlying merchandising strategy and strong new store performance. Store size remains unchanged; 2026 openings are primarily in older markets, with a cadence weighted to summer and fall.

• Question from Marnie Shapiro (Retail Tracker): Did DDs see similar trends (traffic-driven) and have you implemented price increases due to tariffs?
  Response: Trends for DDs are very similar to Ross, including being driven by transaction growth. DDs has also implemented price increases over the last year, and has a vibrant home business comparable in size to Ross.

Contradiction Point 1

Driver of Merchandise Margin Improvement

Conflicting attribution for Q4 merchandise margin improvement between buying/merchandising vs. lower markdowns.

Tracy Cogan (Citigroup) - Tracy Cogan (Citigroup)

2026Q4: Merchandise margin improvement was mostly due to better buying/merchandising decisions. - Bill Sheehan(CFO)

How much of the 10-basis-point Q4 merchandise margin improvement was driven by better IMU from buying versus lower markdowns, and what are the expectations for FY26? - Tracy Pogon (Citigroup)

2026Q4: Q4 margin improvement was mainly driven by better buying and merchant decisions. - Jim Conroy(CEO)

Contradiction Point 2

Characterization of Customer Count Growth

Shift from acknowledging data complexity to definitively stating growth is broad-based and includes specific demographics.

What are Goldman Sachs' key priorities for the upcoming quarter? - Brooke Roach (Goldman Sachs)

2026Q4: Data is complex, but growth is broad-based across income and age demographics, including 18–34-year-olds. - Jim Conroy(CEO)

Are shifts in customer demographics (age, income) due to higher traffic driven by reactivation of lapsed customers or new younger customers? - Juliana Príolo (Wells Fargo)

2026Q4: No significant changes in customer base composition. Growth is broad-based across income levels, age, and ethnicities. - Jim Conroy(CEO)

Contradiction Point 3

Nature of New Store Productivity

Inconsistent explanation for higher productivity, shifting from regional execution to explicit mention of entering higher-rent markets.

Julianne (Wells Fargo) - Julianne (Wells Fargo)

2026Q4: Higher productivity is seen across regions (including California, Florida, Texas) due to operational improvements and more aggressive execution in new stores. - Michael Hartshorn(COO)

Is the increase in new store productivity due to entering higher-rent, high-sales-per-sq-ft markets? - Mark Altschwager (Baird)

2026Q4: Higher productivity is seen across all regions, not just new markets. - Jim Conroy(CEO)

Contradiction Point 4

Marketing Spend as a Percentage of Sales

Contradiction on whether marketing spend has increased or remained flat as a percentage of sales.

Chuck Grom (Gordon Haskett) - Chuck Grom (Gordon Haskett)

2026Q4: Marketing spend as a % of sales has not changed; it may be a future lever but is not required currently due to strong demand. - Jim Conroy(CEO)

How is your marketing strategy evolving in 2026, and do you expect marketing expenses as a percentage of sales to increase? - Corey Tarlowe (Jefferies)

20251121-2026 Q3: Marketing spend as a percentage of sales has not increased, but early metrics show improvement. - James Conroy(CEO)

Contradiction Point 5

Long-term Earnings Algorithm and EBIT Margin Leverage

Inconsistent guidance on long-term earnings growth and margin expansion drivers.

Brooke Roach (Goldman Sachs) - Brooke Roach (Goldman Sachs)

2026Q4: The long-term earnings algorithm is largely unchanged: 5% new store growth, 70–75% new store productivity, 3–4% comp, with EBIT margin leveraging 3–4%, leading to 8–10% long-term earnings growth. - Michael Hartshorn(COO)

Are shifts in customer demographics (age, income) due to reactivated lapsed customers or new younger customers with higher traffic, and what is the latest view on the earnings algorithm and potential to return to a 14% operating margin? - John Kernan (TD Cowen)

2025Q2: Long-term algorithm: 5% store growth (60% EPS contribution), 3% comp (3% EPS contribution), 1%-3% EBIT upside, and 2%-3% stock buyback, leading to ~double-digit EPS growth on a 3% comp. - James G. Conroy(CEO)