Ross Stores

Ross' fiscal second-quarter results included 13% net sales growth and a 10% comparable-store sales increase. Adjusted operating margin expanded by 205 basis points —excluding 405 basis points of tariff refund benefits—on an increase in merchandise margin and lower distribution costs.

Why it matters: We see these results as demonstrating the durability of Ross' off-price model as the firm continues to capture a broad base of value-seeking customers and capitalize on abundant wholesale inventory availability. Higher transactions underpinned the second consecutive quarter of double-digit comparable sales growth. We are encouraged that Ross' merchandising and marketing efforts are successfully attracting new shoppers, recapturing relapsed ones, and driving trip frequency. We think Ross is strengthening vendor relationships through strong sales growth, improved in-store presentation, and stronger brand relevance. Vendors that previously resisted off-price have become more willing to supply Ross, thereby improving assortment quality for customers.

The bottom line: We plan to raise our $176 per share fair value estimate for wide-moat Ross Stores by a mid-single-digit percentage after stronger-than-expected second-quarter sales and operating margin. Shares rose 9% after hours on Aug. 20, leaving them more than 30% overvalued. We posit the market as pricing in mid-single-digit comparable sales growth over the long term from outsize consumer trade-down demand, which we view as unlikely to persist. We forecast 3.8% comparable sales annually over the next decade as this demand normalizes.

Between the lines: Ross deliberately avoided being the first to raise prices and pass on tariff costs, even intentionally absorbing margin burdens last year. We view this as a savvy move that cemented its low-price leadership and resonated with its customer base.

We have raised our fair value estimate for Ross Stores to $187 per share from $176, reflecting stronger-than-expected second-quarter sales and operating margin performance. We increased our average comparable sales growth forecast to 3.8% over the next decade (skewed upward by our 9% forecast for fiscal 2026) from 3.6% previously, supported by stronger customer acquisition, trip frequency, and merchandising execution. While these factors lift our near-term and midcycle outlook, we continue to expect recent outsize traffic gains to normalize and make no material change to our long-term margin thesis. Our revised valuation implies a fiscal 2027 EV/adjusted EBITDA multiple of roughly 16 times.

The core driver of Ross’ valuation remains its domestic off-price apparel model. We forecast revenue growth of 6.8%, supported by traffic gains as trade-down behavior persists across income cohorts and by rapid inventory turnover that allows for frequent assortment refreshes. Unit growth is an increasingly important contributor—we model roughly 80 net new stores annually, contributing 3.1% to annual sales growth. Management’s reaffirmed long-term target of roughly 3,600 US stores underpins this outlook, bringing the store base to just over 3,000 locations by the end of the decade.

Profitability expansion is another key lever. We forecast operating margins rising to 13.5% by fiscal 2035, up from 11.9% in fiscal 2025, driven by both gross margin expansion and operating leverage. We model 50 basis points of gross margin improvement (from 27.7%) as buying scale, pack-away utilization, and supply chain investments improve mix and reduce markdown risk. At the same time, we expect selling, general, and administrative expenditures as a percentage of sales to decline by roughly 110 basis points (from 15.8%), reflecting labor productivity, distribution efficiencies, and fixed-cost leverage as the store base expands. Even after these gains, our modeled SG&A remains roughly in line with Ross’ adjusted 10-year average of 15.1%, reflecting a structural step-up in cost basis from rising store-level wages and ongoing investments in loss prevention to combat shrink.

We assign Ross Stores a wide economic moat, underpinned by a durable cost advantage and supported by intangible assets tied to its off-price sourcing ecosystem, vendor relationships, and value-oriented brand positioning. In our view, Ross’ structural advantages will enable the firm to consistently generate economic returns well above our estimate of its weighted average cost of capital (7.8%) for at least the next two decades, as its 10-year average return on invested capital is 40%.

Ross’ moat stems from a price-led cost advantage. Ross is optimized to deliver the lowest possible opening price on branded goods to a broad base of primarily lower- and middle-income consumers (roughly $40,000 to $70,000 average annual income). This distinction is crucial, as Ross does not attempt to maximize brand prestige or trend relevance; instead, it maximizes value per dollar spent, allowing for lower price points and higher inventory turns than most retailers. For example, Ross posts the fastest inventory turnover among peers at 58 days compared with TJX (64), Macy’s (119), Kohl’s (109), and Burlington (74).

The foundation of this cost advantage lies in Ross’ low-risk inventory model, which allows it to purchase merchandise opportunistically, avoiding the markdown exposure embedded in full-price retail. Department stores such as Macy’s, Kohl’s, and JCPenney commit to seasonal assortments months in advance and rely on promotions to clear inventory, compressing margins and increasing earnings volatility. Ross, by contrast, lets suppliers and full-price retailers absorb forecasting risk and then acquires merchandise at a lower cost, enabling its lower prices. Ross’ cost advantage is magnified by scale-driven operating efficiency, not by fashion curation. The company runs a self-service store format with limited staffing, minimal fixtures, and little reliance on advertising. Off-mall locations and simple layouts keep occupancy and labor costs low, while centralized merchandising and distribution allow for fixed-cost leverage. Because it does not require uniform assortments or full-size runs across stores, Ross can flex inventory flow based on availability, avoiding costly rebuys or promotions. In our view, this operational flexibility lowers breakeven sales productivity and supports profitability even at lower average ticket prices (20% to 60% lower than department store pricing). Taken together, Ross’ low-risk inventory model and no-frills store format support strong store-level economics, with operating profit per square foot of roughly $61, close to TJX ($68) and far exceeding Burlington ($24), Macy’s ($9), and Kohl’s ($8).

Importantly, Ross’ lower prices differentiate it not only from department stores but also from other off-price retailers. Relative to TJX, Ross competes at a more accessible price tier, with less reliance on premium or fashion-forward labels and greater emphasis on everyday branded value. This resonates with Ross’ core lower- to middle-income customer, expanding its addressable market by reducing the income threshold required to shop branded apparel on a recurring basis. Higher throughput per store improves purchasing leverage, accelerates inventory turns, and reinforces fixed-cost absorption, strengthening the cost advantage over time.

Ross’ intangible assets support this cost advantage. Ross has built a brand that stands for dependable value, creating the expectation that each visit offers a high probability of finding branded goods at meaningfully lower prices compared with traditional retail channels. This expectation drives repeat visits, evidenced by the firm’s outsize sales productivity—Ross generates roughly $504 in sales per square foot, exceeding Macy’s ($231), Burlington Stores ($341), and Kohl’s ($192). We believe this underscores the strength of Ross’ value proposition, proving that its brand drives industry-leading demand without reliance on traditional promotional levers.

Ross also benefits from long-standing vendor relationships, and we view these as an outcome of its scale and reliability, helping reinforce its cost advantage. For suppliers, Ross is a dependable, high-throughput outlet capable of discreetly clearing excess inventory. Over time, this reliability improves merchandise access and margins, but critically, Ross’ model is driven by price discipline and cost control rather than brand exclusivity. This is reflected in Ross’ sourcing relationships with more than 7,000 vendors. While this is fewer than TJX’s roughly 21,000 vendors, we view the difference as less meaningful given Ross’ primarily domestic footprint and materially more significant when compared with smaller off-price peers such as Burlington, which we estimate to work with just over 1,000 vendors.

In the competitive landscape, Ross occupies a defensible position. Department stores and midtier apparel retailers struggle to match Ross’ price points without sacrificing profitability due to higher labor, occupancy, and promotional costs. Smaller off-price peers lack the scale, purchasing volumes, and cost absorption needed to compete effectively on price while maintaining margins. This can be seen in Burlington’s mid-single-digit operating margins compared with the low-double-digit margins that Ross and TJX generate. Furthermore, TJX and Ross capture nearly 80% of domestic off-price apparel sales (49% and 30%, respectively, as of 2023), outpacing Burlington (14%) and Nordstrom Rack (7%). We believe this underscores the difficulty in replicating the off-price model at scale. Additionally, even as e-commerce continues to pressure discretionary retail, we believe Ross’ model, focused on opportunistic buying and in-store value discovery, remains less exposed to digital disruption than full-price apparel, where online transparency accelerates price competition and margin erosion.

A permanent shift in consumption habits could see higher-income households trade down, favoring off-price channels. This could drive average comparable sales growth above our 3.6% estimate.

Accelerated department store consolidation could clear a wider path for Ross to surpass its 3,600 store target, fueling market share gains that exceed expectations.

The dd’s Discounts banner targets a younger, more value-constrained consumer than the core Ross chain, creating an incremental growth wedge that could expand the firm’s total addressable market beyond current assumptions.

Dependence on vendors sourcing from China (about 50% of merchandise) creates a structural vulnerability to tariffs, posing a long-term threat to the low-cost procurement model essential for off-price leadership.

Increasing competition for off-price inventory from peers and the proliferation of direct-to-consumer channels by brand owners could limit the availability of high-quality, name-brand pack-away goods.

Heavy store concentration in California and Texas (nearly 40% of locations) creates excessive exposure to regional economic shocks and regulatory shifts.