Is Ross Stores (ROST) a Buy Before Earnings? Decoding Q2 Guidance and Analyst Sentiment

Ross Stores (NASDAQ: ROST) has long been a darling of the off-price retail sector, leveraging its reputation for discounted branded goods to deliver consistent growth. However, as the company prepares to report Q2 2025 earnings, investors face a critical question: Is ROST a buy ahead of the release, or does the recent soft guidance signal a shift in its trajectory? To answer this, we must contrast its historically robust performance with the current cautious outlook and assess whether valuation optimism justifies the risk.

Historical Strength: A Decade of Growth and Resilience

Over the past five years, Ross Stores has demonstrated a compelling mix of revenue and earnings growth. From 2020 to 2024, the company achieved a 5.67% compound annual growth rate (CAGR) in revenue and a 6.55% CAGR in earnings per share (EPS). These figures reflect its ability to capitalize on shifting consumer preferences, particularly during periods of economic uncertainty when value-conscious shoppers flocked to its stores.

The company's valuation metrics have also been a point of interest. While its trailing twelve months (TTM) price-to-earnings (P/E) ratio currently stands at 21.74, this is a sharp decline from its 5-year average of 52.7. Historically, ROST's P/E peaked at 463.71 in early 2021, a period marked by speculative fervor in retail stocks, and bottomed at 17.93 in 2017. This volatility underscores the market's fluctuating confidence in the company's growth prospects.

Comparable store sales, a key metric for retail stocks, have also shown resilience. From 2020 to 2023, ROST posted double-digit growth in most years, with a peak of 9% in fiscal 2022. Even in 2024, the company managed a 3% increase in comparable store sales, albeit a slowdown from the 5% growth in 2023. This trend highlights Ross Stores' ability to adapt to macroeconomic cycles, particularly during periods of inflation and shifting consumer spending patterns.

Recent Soft Guidance: A Cautionary Shift

The current earnings season, however, tells a different story. Analysts are forecasting Q2 2025 EPS of $1.54, a 4.4% decline year-over-year, while revenue is expected to rise 4.6% to $5.54 billion. This represents a moderation from the 7.1% revenue growth in Q2 2024. The projected 1.7% year-over-year comparable store sales growth for Q2 2025 is also a significant slowdown from the 4.0% growth in the prior year.

For the full fiscal year 2025, Ross Stores has adopted a cautious stance, guiding for comparable store sales to decline by 1% or grow by up to 2%. This stark contrast to the 3% growth in fiscal 2024 reflects broader macroeconomic headwinds, including rising inflation, proposed tariffs on imported goods, and unseasonable weather. The company has also flagged reduced consumer traffic and shifting spending habits, particularly in discretionary categories, as key challenges.

Valuation Optimism: Is the Market Overestimating ROST?

Despite the soft guidance, analyst sentiment remains largely positive. Twelve analysts have set price targets ranging from $126 to $170, with a median of $156. Notably, institutions like JP Morgan, Jefferies, and Loop Capital have reiterated “Overweight” or “Buy” ratings in recent months. The stock's current price of $148.20 is close to the median target, suggesting that the market is pricing in a recovery in the near term.

However, the company's valuation metrics tell a more nuanced story. ROST's P/E ratio of 21.74 is lower than peers like The TJX Companies (31.55) but higher than Dollar General (21.50). Its PEG ratio of 4.39, which factors in expected earnings growth, indicates that the stock is trading at a premium relative to its future potential. This premium may reflect optimism about Ross Stores' long-term expansion plans, including the opening of 80 new Ross Dress for Less and 10 new dd's DISCOUNTS locations in 2025.

Investment Implications: Balancing Optimism and Caution

The key question for investors is whether the current valuation justifies the risks posed by the soft guidance. On one hand, Ross Stores' historical resilience and aggressive store expansion suggest a strong long-term growth story. Its ability to maintain a consistent dividend (currently $0.405 per share) and repurchase shares also adds to its appeal as a defensive play in a volatile retail sector.

On the other hand, the near-term challenges—rising costs, inflationary pressures, and geopolitical uncertainty—cannot be ignored. The company's guidance for flat or declining comparable store sales in Q1 2025 (-3% to 0%) and the broader sector's pessimism (e.g., Walmart and Target also issuing cautious forecasts) highlight the fragility of consumer demand.

Conclusion: A Cautious Buy for Patient Investors

Ross Stores remains a compelling long-term investment for those who believe in the enduring appeal of value retailing. Its historical performance, coupled with a disciplined approach to expansion and shareholder returns, positions it well for a post-recessionary recovery. However, the near-term risks—particularly the soft guidance and elevated PEG ratio—suggest that investors should approach with caution.

For those considering a pre-earnings purchase, a “buy” decision should be contingent on two factors: (1) a favorable earnings report that aligns with or exceeds the $1.54 EPS forecast, and (2) a pullback in the stock price to closer to $140, which would better reflect its historical P/E averages. Until then, the Zacks Rank of #3 (Hold) and the mixed signals from the guidance warrant a measured approach.

In a market where retail stocks are increasingly sensitive to macroeconomic shifts, Ross Stores offers a blend of growth potential and defensive qualities. But as with any investment, timing and valuation discipline will be critical to unlocking its upside.