Is Now the Time to Buy Ross Stores (ROST) Amid Mixed Analyst Outlooks and Strong Earnings Performance?

The retail sector has long been a barometer of economic sentiment, and Ross Stores (ROST) has emerged as a standout performer in 2025. Despite a backdrop of inflationary pressures and geopolitical uncertainties, the off-price retailer reported Q2 earnings that exceeded expectations, with revenue rising 5% year-over-year to $5.5 billion and EPS of $1.56, beating forecasts by 1.96%. Yet, the stock's muted post-earnings reaction and divergent analyst price targets have left investors questioning whether ROST is a compelling buy. This article dissects the disconnect between ROST's strong earnings execution and cautious price targets to assess its long-term value proposition.

Earnings Resilience Amid Tariff Headwinds

Ross Stores' Q2 results underscore its ability to navigate macroeconomic headwinds. The company's 2% comparable store sales growth, driven by its value-driven model, outperformed broader retail trends. However, operating margins contracted by 95 basis points to 11.5%, primarily due to $0.11 per share in tariff-related costs. These costs, stemming from U.S. trade policies, are expected to persist but at diminishing levels: ROST projects a $0.07–$0.08 per share impact in Q3 and $0.04–$0.06 in Q4.

The company's guidance for fiscal 2025—EPS of $6.08–$6.21—reflects a slight decline from the $6.32 in 2024, but this is largely attributable to one-time benefits in the prior year (e.g., a $0.14 per share gain from a packaway facility sale). ROST's proactive strategies, including sourcing diversification (e.g., shifting 60% of Chinese imports to Vietnam, India, and Malaysia) and localized merchandising, have cushioned the blow of tariffs. These measures, combined with disciplined pricing, position ROST to maintain its margins even as global trade tensions linger.

Analyst Optimism vs. Price Target Caution

Despite ROST's earnings resilience, analyst price targets remain split. The consensus 12-month price target of $156.07 (5.54% above the current price of $147.88) reflects a “Strong Buy” rating from 12 of 16 analysts. However, the wide range—from $128 to $175—highlights divergent views. For instance, Bank of America's Lorraine Hutchinson ($175) and Jefferies' Corey Tarlowe ($150–$170) express strong confidence in ROST's value proposition, while Morgan Stanley's Alexandra Straton ($126–$128) and UBS's Jay Sole ($144) adopt a more cautious stance.

The disparity stems from two factors:
1. Tariff Uncertainty: Analysts like UBS and Morgan Stanley factor in potential margin compression from unresolved trade policies, which could weigh on earnings in the near term.
2. Valuation Concerns: ROST's P/E ratio of 22.86 is below its 10-year average of 38.1 but above the 15.43 peer average. Its PEG ratio of 4.39 suggests the stock is priced for growth that may not materialize if comparable store sales growth slows further.

Competitive Positioning and Long-Term Growth

ROST's off-price model remains a key differentiator. By sourcing closeout and surplus inventory at a fraction of retail prices, Ross offers 20–70% discounts on brand-name goods, a strategy that has proven resilient during inflationary periods. The company's localized merchandising—tailoring inventory to regional demand—has driven 60% of U.S. discount retail demand and a 2% sequential improvement in same-store sales in Q2.

Expansion plans further bolster its long-term outlook. ROST aims to open 90 new stores in 2025 (80 Ross and 10 dd's DISCOUNTS), with a focus on high-growth areas like the Southeast and New York Metro. These openings, combined with store modernization initiatives (e.g., self-checkout pilots), aim to enhance customer experience and drive traffic.

Valuation and Risk Considerations

ROST's valuation appears mixed. While its P/E ratio is below historical averages, the PEG ratio suggests the stock is overvalued relative to earnings growth expectations. Analysts project Q2 2025 EPS of $1.54, a 4.4% decline from the prior year, and full-year comparable store sales growth of 2–3%, down from 3% in 2024. This soft guidance, coupled with a 40% discount to its 10-year P/E, implies the market is pricing in a conservative growth scenario.

However, ROST's robust balance sheet ($4.7 billion in cash reserves, a 1.55 current ratio) and 32-year dividend streak provide a margin of safety. Share repurchases of $262 million in Q2 also signal management's confidence in the stock's intrinsic value.

Investment Thesis

For long-term investors, ROST offers a compelling value entry point if the following conditions hold:
1. Tariff Mitigation: Continued progress in diversifying sourcing and negotiating vendor terms to reduce margin drag.
2. Execution on Expansion: Successful integration of new stores and modernization initiatives to drive traffic and average ticket size.
3. Margin Resilience: Ability to maintain operating margins above 11% despite macroeconomic headwinds.

The stock's current price of $147.88 is 5.5% below the average analyst target, suggesting a moderate upside if ROST meets its guidance. However, investors should monitor near-term risks, including potential margin compression from tariffs and softer consumer demand in key categories like apparel.

Conclusion

Ross Stores' Q2 earnings highlight its ability to deliver value in a challenging retail environment, but the cautious analyst price targets reflect lingering uncertainties. While the stock's valuation is not egregious, it is priced for a world where growth is modest and tariffs remain a drag. For investors with a 3–5 year horizon, ROST's strong earnings execution, defensive business model, and expansion plans make it a compelling candidate—provided they are comfortable with the near-term volatility and macroeconomic risks. As always, diversification and a focus on fundamentals will be key to navigating this complex landscape.