ROST.US (ROST.US) Q2 conference call: Double digit growth for two consecutive quarters, CEO shouts “Growth has just begun”
The Zhitong Finance App learned that ROST.US (ROST.US) had strong results in the second quarter. Comparable store sales increased 10%, and recorded double-digit increases for two consecutive quarters. At the second quarter results conference call, management attributed the core growth to being driven by customer flow. The acquisition of new customers, recall of lost customers, and the shopping frequency of existing customers were working simultaneously with the three dimensions of a “double increase” in customer unit prices. CEO Jim Conroy stressed that the current growth initiatives are still in the “early stages” and that the full potential is far from being unleashed. The company maintains a differentiated pricing strategy and does not pass on tariff costs to consolidate the cost performance advantage. In view of strong momentum, the company raised its guidance for the second half of the year. It is expected to increase by 6%-7% in the third quarter, and plans to increase the number of new stores from 110 to 115 for the whole year.
Ross Department Store achieved a 10% increase in comparable store sales in the second quarter, and recorded double-digit growth for the second consecutive quarter. Total sales increased 13% to US$6.3 billion, net profit of US$851 million, and earnings per share of US$2.66, a significant increase over the previous year (US$1.56 in the same period last year). CEO Jim Conroy attributed the strong performance to the effectiveness of customer acquisition strategies — customer flow is the primary driver of growth, demonstrating that growth momentum continues to accumulate.
Conroy emphasized that the quality of the growth is as exciting as the numbers themselves. The increase in transaction volume contributed to the vast majority of comparable increases, and the increase in transaction volume stems from simultaneous progress in three dimensions: acquisition of new customers, recall of lost customers, and a “double increase” in shopping frequency and customer unit price for existing customers. It is worth noting that the new customer group is highly consistent with existing customers in terms of revenue, age, and ethnic structure, and is called an “almost perfect report card” by management, reflecting that the brand's appeal is being widely recognized rather than limited to a specific group of people.
Chief Financial Officer Bill Sheehan pointed out that gross margin improved by 625 basis points, of which 405 were from tariff rebates. After excluding this one-time factor, the operating margin still increased by 205 basis points, indicating a significant increase in core profitability. Product profit margins were increased by 110 basis points, and distribution costs were reduced by 100 basis points. Management specifically emphasized that despite an 18% year-on-year increase in inventory, inventory turnover continued to operate at a high speed, while maintaining sufficient procurement flexibility to seize clearance opportunities in the second half of the year — a key competitive barrier to the discount retail model.
Conroy defined the current phase as an “early stage” of growth initiatives, believing that the full potential is far from being unleashed. In response to analysts' questions about the pressure of a high base, he said, “We should not worry about superimposing high cardinality, but rather see the momentum that is building up.” Group President Michael Hartshorn added that many of the initiatives are still in the pilot phase and have not been rolled out to all departmental stores — some only cover 200 test stores, and some have only been implemented in specific categories — which means there is still significant room for growth from pilot to full rollout.
In response to the competitive environment, Conroy made it clear that the company will adopt a differentiated pricing strategy that “does not pass on tariff costs” to ensure a stable cost performance advantage over mainstream retail. Regarding inventory risk, management believes that the current continuous increase in product profit margins proves the effectiveness of inventory strategies. In terms of AI applications, Conroy said AI will be the “icing on the cake” for operational efficiency, but currently the core driving force is still “basic skills” — better product mix, better store experience, and more accurate marketing reach.
In terms of guidance for the second half of the year, comparable growth is expected to be 6%-7% for the third quarter and 4%-5% for the fourth quarter. Earnings per share fall in the range of $1.75-1.83 and $2.17-2.26, respectively. Management showed full confidence in this, believing that a “stable and sustainable” growth model has been established. Although the long-term growth algorithm has not been adjusted, there is a clear trend of surpassing this algorithm in the short term. The new store expansion plan was also raised from 110 to 115, further confirming management's growth expectations.
The following are the minutes of Ross Department Store's results call for the second quarter of fiscal year 2027:
Executive speeches
James Conroy
Chief Executive Officer and Director
Thanks Diego and good afternoon everyone. Joining me on the call today were Michael Hartshorn, Group President and Chief Operating Officer, Bill Sheehan, Executive Vice President and Chief Financial Officer, and Connie Kao, Senior Vice President of Investor Relations. Before discussing the results, I would like to commend outstanding teams from all over the company and across the country. Strong sales and profit growth this quarter directly reflect your hard work and commitment to the Ross Organization. Thank you all.
Now let's take a look at our performance. We are very pleased with the 10% increase in comparable store sales in the second quarter, which is the second consecutive quarter of comparable double-digit growth. Sales performance in May was strong and improved month by month. Despite compounding last year's strong back-to-school season performance, July delivered the best results of the season. Customer traffic is once again the main driver of sales growth in comparable stores, which highlights the sustainability of our growth and the momentum we are building. We believe that the increase in customer traffic reflects the effectiveness of customer acquisition strategies.
This quarter, we saw an increase in new and returning customers, as well as an increase in the frequency and spending amount of existing customers, reflecting a further increase in customer participation in the two chain brands. Importantly, the new customers we attract cover a broad range of income groups and age groups, including younger consumers, which we believe reflects the broad appeal of our brand and the success of our marketing efforts in reaching and engaging a diverse customer base. After entering the store, new and old customers all responded positively to our cost-effective products and a wider selection of fashion brands. The procurement and planning team did an outstanding job in developing new suppliers and meeting the needs of all types of customers.
Finally, the store team excels at improving the in-store shopping experience and managing high sales. We are very pleased with the initial success of our growth strategy and are confident that we will continue to expand our market share.
Consistent with recent quarterly trends, Ross's strong performance covered all product categories and geographical regions. In the second quarter, home and beauty were the strongest categories. Geographically, all markets performed strongly, with the Midwest performing best. DD's DISCOUNTS also achieved steady sales growth and showed similar broad performance across product categories and geographical regions.
About inventory. Consolidated inventory increased 18% year-over-year at the end of the quarter. Packaged inventory accounts for 36% of total inventory, compared to 38% in the same period last year. We are using our inventory advantage to not only meet the higher demand for customer traffic in stores, but also expand the range of products displayed in stores across all departments. These efforts have led to higher sales and increased product margins, while maintaining a faster inventory turnover. We're happy with the level and composition of our inventory, and continue to have enough flexibility to seize clearance opportunities as we head into the fall.
Regarding store expansion. We now plan to open 115 new stores in 2026, which is higher than the previous guideline of 110. We are particularly encouraged by recent store performance in existing and new markets, which has further strengthened our confidence in continuing to expand our store network over the long term. Our plans also include the relocation and closure of approximately 5 to 10 stores. Overall, we remain confident about the steps taken with regard to products, marketing, and stores, which are improving the customer experience and driving strong results.
While the results so far have been encouraging, we believe we are only just beginning to unlock the full potential of many of our initiatives. Continued sales performance has strengthened our confidence that more growth-oriented strategies are being recognized by customers. The team is excited about future opportunities, and we see plenty of room to build on the current momentum to continue to drive continued sales growth.
Bill will now provide more details on our second-quarter results and more explanation of our outlook for the rest of the year.
William Sheehan
Executive Vice President and Chief Financial Officer
Thanks Jim. Building on the success of the first quarter, we reported very strong sales and profit results for the second quarter. Total sales for the quarter increased 13% to $6.3 billion, and comparable store sales increased 10%. As Jim mentioned before, comparable double-digit growth was mainly driven by increased trading volume. The gross margin increased by 625 basis points, mainly due to 405 basis point tariff rebates. Product profit margins increased by 110 basis points, and distribution costs were reduced by 100 basis points due to favorable opportunities to cover related expenses, higher productivity, and the base effect of tariff-related processing costs in the same period last year.
Furthermore, the rental cost leverage effect contributed 25 basis points. These benefits are partially offset by procurement costs, 5 basis points of reverse leverage due to increased incentives, and 10 basis points of increase in freight costs due to higher fuel prices. SG&A's reverse leverage for the quarter was 15 basis points due to increased incentives brought about by performance exceeding expectations. The operating profit margin increased by 610 basis points in the second quarter, including the 405 basis point tariff rebate mentioned above. Excluding this revenue, the operating profit margin was 205 basis points higher than the same period last year.
Net profit for the second quarter was US$851 million, compared to US$508 million in the same period last year, and earnings per share were US$2.66, compared to US$1.56 in the same period last year. Sales increased 17% in the first six months of 2026 to $12.3 billion, compared to $10.5 billion in the same period last year. Comparable store sales increased 13% in the first half of 2026, and earnings per share were $4.69, compared to $3.03 in the same period last year. As a reminder, the results for the second quarter and first half of 2026 both included tariff rebates of US$253 million (approximately $0.60 per share earnings).
Regarding shareholder return activities. As stated in today's press release, we repurchased approximately 1.4 million shares this quarter under a two-year $2.55 billion authorization approved by the board of directors in March of this year, at a total cost of $319 million. We are still on schedule to buy back shares totaling $1,275 million in 2026.
Now let's discuss the outlook for the rest of 2026. As stated in today's press release, we've finished the quarter on a strong momentum and are excited about our plans for the fall. Despite facing a significantly more challenging year-over-year base in the second half of the year, we raised our outlook for the third and fourth quarters. Third-quarter comparable store sales are currently expected to increase by 6% to 7%, and earnings per share are expected to be between $1.75 and $1.83, compared to $1.58 in the same period last year. The guidance for the third quarter of 2026 assumes that total sales are expected to increase by 9% to 11% over the same period last year.
If same-store sales meet expectations, the third-quarter operating margin is expected to be between 11.7% and 12.0%, compared to 11.6% in the same period last year. Our forecasts reflect the leverage effect of anticipated comparable sales growth and slightly higher product margins. These benefits are partly offset by rising freight costs due to rising fuel prices. As mentioned earlier, we have raised our annual new store opening plan. Currently, we expect to open 51 new stores in the third quarter, including 41 Ross stores and 10 DD's stores. Net interest income is expected to be around $30 million. The tax rate is expected to be around 25%, and the diluted tradable shares are expected to be around 319 million shares.
Looking forward to the fourth quarter. Comparable store sales are currently expected to increase by 4% to 5%, compared to a strong 9% increase in the same period last year. Earnings per share are expected to be between $2.17 and $2.26, compared to $2 for the same period last year. If the results for the second half of 2026 are in line with the above forecast, the annual earnings per share are expected to be between 8.61 and 8.77 US dollars, compared to 6.61 US dollars for the same period last year. This year's forecast includes approximately $0.60 in tariff rebates per share.
Now I'm returning the phone to Jim to make a concluding statement.
James Conroy
Chief Executive Officer and Director
Thanks Bill. We had a very strong first half and remain optimistic about the positive trends we have seen in our business. While we're happy with how things have progressed over the past few quarters, we're still focused on continuing on the current momentum. Ongoing work across the company revolves around continuously strengthening brand relevance, providing a world-class product portfolio, and further improving the in-store experience. We believe we are just beginning to unlock the full growth potential of our business.
We are now willing to open a question-and-answer session.
Q & A session
Matthew Boss
J.P. Morgan Research Division
Congratulations on a fantastic quarter. Jim, can you elaborate on how the second-quarter revenue momentum was built and the driving force behind this strong exit rate? Also, despite facing a more difficult comparison base, can you talk about the opportunities that still exist in product portfolio, marketing, and store execution in the second half of the year and beyond?
James Conroy
Chief Executive Officer and Director
Glad to answer, of course. The quarter has been very solid, and we are not only excited about the fundamental figure of 10% comparable growth, but also satisfied with the quality of the growth. The increase was mainly due to increased trading volume. These deals stem from customer acquisition — both new customers and the return of lost customers. We're seeing an increase in the frequency of shopping for existing customers, and all customers are spending more. Therefore, judging from customer KPIs, they are all extremely stable. Product KPIs are also steady. We have seen widespread growth in all product categories under both the Ross and DD's brands. Geographic indicators are equally strong, with widespread growth in all regions of the country.
In the course of this quarter, June was slightly affected by the World Cup, and July was very strong. If you remember the conference call from the same period last year, we mentioned that July was significantly faster than June. Therefore, on the basis that July of last year was already strong, July of this year was the strongest month of the season — you can assume that its growth rate is bound to exceed 10% — the exit rate is very, very good. As we enter August, we continue to be very encouraged by the current business and the momentum that is being built up. Last year's August was the strongest month of the season.
As a result, we still don't think we need to worry about comparison with a strong base. In the previous conference call, we talked about two ways of thinking: whether to worry about superimposing a high base, or to think that building potential energy and flywheels can continue to drive business growth. Hopefully, after strong comparable growth in the fourth quarter and our fairly solid guidance for the next two quarters, this concern can be dispelled, as the fundamental indicators we have seen are very positive in all aspects.
If you go back to some of the initiatives we launched last year, they're all still in their early stages. Some have already been promoted nationwide, but some have only been implemented in certain stores; some have been launched in all product categories, and some are still awaiting further promotion. Of course, we've also launched new initiatives. So it can't be overemphasized — our outlook for the rest of the year is still very optimistic, with plenty of opportunities to continue the growth we've seen.
Lorraine Maikis
Bank of America Securities Research Division
Jim, you've just achieved a comparable 10% increase, and you're still talking about many of the initiatives that are still in the early stages. Can you talk about which initiatives you think have the most room to grow and continue to drive the comparable growth presented in the guidelines?
James Conroy
Chief Executive Officer and Director
Of course. I'll talk about it at a higher level. One thing I've learned is that I instinctively tend to provide more details, but this will let other retailers quickly understand what we're doing and try to follow suit. But in the hope of providing some transparency, let's go back to the three aspects of products, stores, and marketing. I can list a dozen or so initiatives for each.
The product team has done a great job in continuing to build high-quality product portfolios, develop new suppliers and brands, and better tell product stories across categories. Store team — I encourage everyone present to check out the store; you'll see a well-organized store, quick restock inventory, and shorter queue times. The store team has indeed successfully met the challenges brought about by the sharp acceleration in sales over the past year or so.
From a marketing perspective, similarly, you can see our marketing actions, see our ads, and follow us on social media. We have received significant user engagement in communicating new ideas, and we have adjusted our media mix. But if I go over every point I just mentioned and the dozen other initiatives I have not clearly identified, you can never think we have implemented them all. So as we review our business, we wake up every day with more ideas to drive further growth.
Corey Tarlowe
Jefferies Research Division
Jim, the momentum of comparable growth continues to be impressive, and the amount of work we have done on marketing continues to show very strong momentum. I'm curious how you feel about marketing's role in driving new customer acquisition, and if these new customers are in a higher income group, and how different the types of products they buy are compared to products in their previous product portfolio?
James Conroy
Chief Executive Officer and Director
Of course. The marketing team, whether it's the creative team, the analytics team, or the media procurement team, I think they've all done a great job, but what I'm saying is — we're still learning, right? We still think there's room for more improvements. We did see new customers entering the store who had never shopped at Ross and DD's before, and re-attracted some customers who had shopped with us in the past but are now returning.
As for the characteristics of the new customer base, if I were to be honest, I couldn't find a better report card than this. The short answer is: Our new customers and their group profile are very similar to our current customers, which means we're seeing growth in every household income group, every age group, and every ethnic group we track. Therefore, this is broad-based customer acquisition growth in all dimensions, which is useful because it means that the value propositions we offer in our stores that are known to work for existing customers also apply to new customer groups.
Does that answer your question?
Corey Tarlowe
Jefferies Research Division
Yes, very helpful. Good luck.
Charles Grom
Gordon Haskett Research Consultants
Jim, can you talk about how the past year's success has translated into a stronger supplier flywheel effect — including new suppliers entering the mix and deepening relationships with existing suppliers? Also, regarding the opportunity to lose customers, I remember you haven't mentioned this before. Can you give us an estimate of the size?
James Conroy
Chief Executive Officer and Director
Of course. I've only been here for 18 months, and I've been amazed at the strength and partnership we have with our supplier community. They are true partners and our lifeline for growth. The team — this has definitely been the case before me — Karen and Karen from all departments have always aimed to be a true partner and easy to work with suppliers, and I often hear this kind of feedback.
I think the collaboration with existing suppliers and the introduction of new suppliers are all related to two or three factors that are happening in the business. First, it's our growth, right? We have continued to deliver good growth results, and I think any supplier would appreciate this; maybe the tide is rising. Second, some suppliers that may have resisted supplying discount channels in the past, or especially to Ross, now walk into our store and see that their products will be displayed and displayed in a clean and orderly manner. The efforts made by the store team to enhance the in-store shopping experience may have further improved the experience of working with suppliers because they know that products will be treated with care.
Finally, I often hear vendors say they've seen a change in brand positioning, think it's a fun and exciting brand, and they want to get involved. So putting these three factors together, I think partnerships with existing suppliers are still very strong, and the procurement team continues to achieve greater success in relentlessly developing more brands.
I'm not sure if that answered both of your questions. Have I covered everything?
Charles Grom
Gordon Haskett Research Consultants
You definitely answered the first question. What I'm curious about is that you mentioned that a lot of your traffic comes from new customers, but also from lost customers. So I'm wondering if there's a way to estimate the size of this opportunity and how the team can be more aggressive in getting these lost customers.
James Conroy
Chief Executive Officer and Director
Of course. Let me explain a little bit about how we obtained this information. We use a third party credit card data provider, which is widely available in the market, but anyone has to pay to use it. So we can see credit card numbers that haven't entered the store for a certain period of time, and when they return — that's how we measure it.
This is a relatively new capability, and we target these customers in our marketing strategy. Now we have the ability to measure based on credit card data, which may be slightly rough, but definitely directional. Of course, the goal is to show them a world-class portfolio of products, have a great in-store experience, and encourage them to come back more often — we're seeing this too.
Paul Lejuez
Citigroup Research Division
Jim I was wondering if you could quantify the number of new customers year over year? How did the share of sales from new customers in the second quarter compare to the first quarter? The same question is on the supplier side — can you quantify how the number of suppliers you work with now compared to a year ago? How would you describe these new vendors? Do they have anything in common? What should the final reasonable number of suppliers be?
James Conroy
Chief Executive Officer and Director
Regarding supplier issues, there are times when we try to introduce stronger national brands into our stores. When they enter, sometimes it's a net addition, but sometimes they also replace a relatively minor supplier. So the number of suppliers alone doesn't explain the problem.
I think if you walk into a store and look at the brand label inside the store, you'll start to feel — not necessarily a higher-priced supplier — but rather the strength of the brands we sell now, which is actually just an extension of the brand strategy that began a few years ago.
When it comes to quantifying customer acquisition, it's hard to provide that much data. And I guess this also involves some proprietary information. But if you analyze some of the things we've said: the 10% comparable increase was mostly due to increased transaction volume, and a small portion was due to an increase in shopping basket amounts. And in these deals, it's a combination of new customers, returning customers after shopping with us, and existing customers shopping more frequently. I wouldn't say it must be one-third, one-third, one-third, but you can think in these three dimensions.
So every dimension itself is significant — the arrival of new customers, recalls of lost customers, and an increase in the frequency of shopping for existing customers. Also, I think we can continue to find more opportunities to advance all of these aspects.
Michael Binetti
Evercore ISI Institutional Equities Research Division
Let me also congratulate you on a fantastic quarter. I'll ask a question first and then follow up if I can. You've talked a lot about increased supplier acceptance and a stronger supply of products. As sales and store experiences improve, does this change the quality of products every supplier is willing to offer you? Are you getting more of a better, top-tier product mix? More importantly, is purchasing higher-end categories from these vendors more competitive than in the past with other discounters?
James Conroy
Chief Executive Officer and Director
I'm not quite up to date with the second part of your question. The first part is whether we're getting more vendors or even higher-end or better quality products. What's the second part of your question?
Michael Binetti
Evercore ISI Institutional Equities Research Division
As you get a better, best-in-class product mix, do buyers find that these high-end products from suppliers compete more intensely against other discounters?
James Conroy
Chief Executive Officer and Director
Understood. I think the answer to the first part of your question is yes, we have more opportunities to get better brands, more popular brands, but not necessarily higher priced brands. As to whether competition is more intense, I think all discounters — one of which has already published results — are quite adequate from the supply side and from the perspective of clearance opportunities. There are a large number of products that can continue to support growth. And to some extent, we've been competing for the next batch of procurement opportunities.
We have some strong competitors. We currently have a slight advantage due to unconventional growth. So I think sometimes we're able to develop suppliers because we're growing faster, or because a competitor might not need more products. So there are multiple factors at play. We still have a lot of work ahead of us, and we need to keep knocking on doors and persevere in communicating with brands that want to introduce into stores — I myself call suppliers from time to time to do my best to develop cooperation.
Michael Binetti
Evercore ISI Institutional Equities Research Division
If I could ask a follow-up question. As you look beyond this year — which has already been excellent — do you think the business will eventually return to what we think of as traditional discounters in the same store sales growth range of 3% to 4%? Or will continued pilots and initiatives in marketing, product, and customer acquisition support comparable growth potential beyond this level over a longer period of time? For the latter to be established, what conditions are required to continue to function?
Michael Hartshorn
Group President, Chief Operating Officer and Director
Michael, I'm Michael Hartshorn. We are clearly satisfied with the current results and trends. As Jim mentioned many times, many of our initiatives in store testing, product testing, and even marketing testing are still in the very early stages. Therefore, we think we can definitely continue to grow on current trends and continue to build on this year's very strong comparable growth. As to whether it's time to update our long-term growth model, I think the right time is after some of our initiatives have taken a step further. Therefore, we are not currently updating the long-term year-over-year model, but we hope to surpass this long-term model in the short term.
Alexandra Straton
Morgan Stanley Research Division
OK. Jim, going forward, will the initiatives you mentioned require a higher structural level of investment to sustain this high and comparable growth? Or is most of the investment already reflected in the current cost structure? I have a follow-up question.
Michael Hartshorn
Group President, Chief Operating Officer and Director
I'm Michael. In terms of cost structure, you can see performance in the income statement and capital structure. Obviously, we've expanded single-store growth, which requires additional investment, but it's the best investment we can make for the company. Typically, this capital can be recovered within 2 to 3 years. Of all the initiatives, the greatest impact can be achieved in 2,300 stores. We have a very good ability to test and learn.
Therefore, our investments are first tested in pilot stores. If it works, then it makes sense whether it's capital investment or through a profit and loss statement. Despite these initiatives, we have achieved a leveraged effect on store payroll this year, and SG&A as a whole has also been leveraged. We'll keep testing — if it works for the overall profit and loss statement, we'll invest. We are very satisfied with being able to manage capital and expenses while moving forward with new initiatives.
Brooke Roach
Goldman Sachs Research Division
I'd like to follow up on Alex's question, is there any area where you think you should invest more and speed up the pace of investment, such as marketing or other aspects, given the success of these growth initiatives? In other words, have your thoughts changed in terms of the level of profit margin transmission corresponding to a comparable increase of one percentage point above the guideline?
James Conroy
Chief Executive Officer and Director
Maybe I can answer that first, and Michael or Bill can add if needed. We've been asked the question: Should we do more? Can it drive greater growth? We're very happy with the current potential growth. Demand generation is currently not a major challenge facing us.
When it comes to the synergy of all of these factors and our profit margin transmission — as we prepare for the call, we always ask ourselves: Sales are very strong, how is the profit margin transmission? Will it live up to expectations? The answer to this question has been affirmative for the past four or five quarters. Therefore, for now, we will continue to operate within the framework of the existing economic model, maintaining the profit margin transmission assumptions that already exist in the market.
If — I want to state ahead of time, if at some point in the future we think we need to overinvest or invest more in exchange for longer-term value, I'd really like to explain it to the market before we act, rather than wait until the end of the quarter to surprise you. So now, in addition to some of the small investments that have been absorbed by growth, we are operating within a financial structure that has been established over the years.
William Sheehan
Executive Vice President and Chief Financial Officer
Yes, Brooke, the model of 10 to 15 basis points for every 1% comparable increase still applies.
Mark Altschwager
Robert W. Baird Research Division
First, I'd like to continue to ask about profit margins, probably focusing more on the near future. If my calculation is correct, I think the guideline increase for the second half of the year seems to have exceeded the level of 10 to 15 basis points for every 1% comparable increase — in terms of the increase in profit compared to the increase in comparable growth. Am I understanding this correctly? What other factors influence profit margin transmission assumptions for the second half of the year? Other than the leverage effect brought about by higher sales, have there been any changes in views on favorable and negative profit margins in the second half of the year?
William Sheehan
Executive Vice President and Chief Financial Officer
Yes. I think the second half of the year is in line with our revised comparable growth guidelines — 6% to 7% and 4% to 5%. We are seeing good revenue momentum and are happy with our current plans. But our guidelines reflect some of the factors we mentioned: higher product margins, lower distribution costs. So it's in line with expectations.
Mark Altschwager
Robert W. Baird Research Division
OK. Let me ask another broader question about the competitive landscape. Many large national retail chains were more active in price investment in the second half of this year, putting some tariff rebates back into the market. Considering the quarterly acceleration and August trends you mentioned, it doesn't seem to have been affected. Even so, how do you consider maintaining a value gap in this environment? What are your assumptions about customer unit price growth in the second half of the year, and how might this assumption change if competitive pricing is maintained?
James Conroy
Chief Executive Officer and Director
Of course. Let's start with the general premise — we always wanted to have a pricing umbrella and be below mainstream retail. Second, if you look back at the past four quarters, we are very reluctant to pass on the pressure of rising average sales prices. Even when tariffs were first implemented this year, we clearly indicated some of the effects on profits. As a result, I think a lot of other retailers have taken a different strategy — trying to pass on costs, and are now probably reorienting.
We've been working hard to maintain more stable pricing. In the current environment, in the current inflationary economy, we definitely want to provide the best value in our stores. If we see that we no longer have a price umbrella compared to mainstream retail, we'll make adjustments. But I think we're still safe for now. In the second half of the year, you might see a very moderate increase in the average selling price, roughly equivalent to the current level — a single digit low.
We really want to support our customers as they face higher oil prices and other inflationary pressures in their lives. So this is an important question, and it's also a strategic one. But I like the consistency of our current pricing strategy. And I think, as of now, if we do some competitive price research, we'll look very competitive.
Irwin Boruchow
Wells Fargo Securities Research Division
Please accept my congratulations too. I'd like to know about profit margins for the second half of the year. Can you tell us the exact composition of gross margin in the third and fourth quarter plans? Also, I know you mentioned that the second quarter shipping rate was 10 basis points negative. Will it get worse in the second half of the year? What are your thoughts on the contract since the last exchange? Would love to know how to consider shipping costs.
William Sheehan
Executive Vice President and Chief Financial Officer
Yes. You've heard the details of the third quarter. We will obviously provide more details on our fourth-quarter profit margins when we release our third-quarter results, but we do expect that product margins will continue to be smooth, and distribution costs will also be somewhat favorable. I think similar to the third quarter, we expect domestic freight rates to be inversely leveraged due to rising fuel costs.
As you can guess, the increase in sales guidance for the fourth quarter meant an improvement in the EBIT margin compared to last year. When it comes to fuel, we don't hedge fuel costs. The biggest component of shipping costs is fuel. Therefore, if fuel prices change significantly from where they are now, it will have an impact. However, we have included higher fuel costs in our current guidelines.
Irwin Boruchow
Wells Fargo Securities Research Division
Was the impact worse in the third and fourth quarters than in the second?
William Sheehan
Executive Vice President and Chief Financial Officer
I think it depends on changes in fuel prices. We've made the best estimate based on current prices. But again, this depends on future trends.
Jay Sole
UBS Investment Banking Research Division
Jim, I want to better understand comparable growth trends because it sounds like transaction volume is the main driver, which could mean traffic. But many of the key initiatives — like getting a better brand and holding more inventory in-store — aren't traffic drivers, and marketing (a driver of traffic) or better store execution can drive transaction volume, but these seem secondary. Have we overlooked something — maybe marketing is the bigger driver of traffic, and some product initiatives haven't really shown the results you expected, and you're starting to see those results? Maybe that's why you think Ross's improvements have only just begun and can last much longer?
James Conroy
Chief Executive Officer and Director
That's a great question, Jay. Hope we made it clear. I think these three aspects work together. The part we can't really analyze is — if we see an increase in transaction volume, sometimes a customer might have come to shop but didn't necessarily buy it, and now it's converted because the product mix is good or the store looks better. We can't connect to this last part of the math because we don't have a passenger flow counter.
But I think if you think about what's driving traffic, the reasonable answers should be excellent creative content and excellent media delivery methods — we're continuously adapting our media mix, attracting new customers, customers who have visited and left, and encouraging existing customers to visit more often. Of course, there is an argument — and I'm sure part of it is true — that the current customer already shopped a certain amount of frequency, and now she's happy with the product mix after entering the store. The store looks better and the queue time is shorter, so she's shopping more often.
We can't fully link this to marketing efforts. This might just be a better experience for her to shop more often and possibly tell others. So we're trying to divide it into three convenient dimensions, meaning that marketing drives sales, store experience, and product combinations lead to conversion — sorry, marketing drives customer flow, and product mix and store experience turn traffic into buyers. But the lines between the parts aren't that clear.
So I'm not sure if that answered your question, but we're definitely challenging the marketing team to keep filling in customers at the top of the funnel—it's working. We're challenging the procurement team to bring in the best product mix and keep adding new suppliers — and that seems to be working too. The store experience has definitely improved, not only in terms of how we intuitively visited the store, but our metrics and customer survey tools confirm this. So all parties work together, and we continue to call it a flywheel or virtuous cycle, and we will continue to push it forward.
Jay Sole
UBS Investment Banking Research Division
This helps a lot. Jim, I'll ask you one more question if you allow me. I want to help understand how you view brand relevance because we've all seen the Boot Barn situation and the extent to which brand relevance has increased over the years. But can you link the importance of making the Ross brand more relevant to its access to better branded products? To what extent are you making this connection — not only to get more consumers or higher income consumers, but also to sell Ross to suppliers to get the products you really want?
James Conroy
Chief Executive Officer and Director
It's a very sharp connection, Jay. We want both Ross and DD's to resonate with consumers as the brand itself. Currently, the inherent value propositions of both are very, very value-oriented, and we don't want to lose that. But we do think we can go beyond that — that's exactly what we're trying to do. You can — it's no secret anymore, unfortunately — you can see this from our Instagram post, right? We'll move from product and value stories to more narrative and creatively extended content. This was intentional, and it seems to be working.
Dana Telsey
Telsey Advisory Group
Congratulations guys and I'm happy to see the progress. Regarding the categories you mentioned, Jim, beauty and home were strong drivers, and I remember last quarter it was women's clothing and beauty. The makeup has always performed steadily. Are there any updates in the women's clothing or women's categories? How was the performance? Also, the increase in new store openings — are there any stores in the Tohoku region? Where is it expected to open? Is there a difference in store size? Does the acceleration of new store openings this year mean that the pace of new store openings is likely to accelerate in the next few years?
James Conroy
Chief Executive Officer and Director
OK, I'll start first, then Mike will do the store part. Regarding category growth, yes, let me start with the categories you mentioned. Beauty performance was strong, and Michael Kojundzija and Stephanie Leathers' team — Stephanie Leathers' team, did a great job for several consecutive quarters. The home furnishing business was very strong this quarter. Looking back, although this business was growing, the growth rate was slightly lower than the company average, and now — the growth rate of the home furnishing business has exceeded the company average.
So we at Ross and DD's are seeing particular strength, especially in the more stylish parts of the home — decorative home and kitchen utensils, which have reached medium double digits. So kudos to Gurmeet and his team. Regarding the women's category, the women's business continues to be strong. We haven't emphasized it in particular, so it's not one of the top two, but you've always reminded us that it's part of the brand strategy etc.
It contributed positively to comparable growth in the first quarter. The second quarter was slightly below the company average, but remained largely flat. The younger part of the business — particularly girls' clothing — is seeing decent growth. So that part of the strategy is still strong. But it's really encouraging when I stare at the sheet of paper in front of me — and I admit you can't see it — to see that comparable growth in every major product category is positive.
Michael Hartshorn
Group President, Chief Operating Officer and Director
Dana, when it comes to real estate, the team did an excellent job of expanding the project reserve, and we are aiming for 5% single-store growth per year. The 5 additional stores this year are stores we were originally hesitating about — whether we can open, complete negotiations and construction this year, or wait until next spring. The team did a great job and we're ready for this year. This is the reason for the increase.
Regarding the location of the store, apparently you saw that we have entered the Tohoku region. We are very happy with the performance there. Overall performance of new stores this year — We originally planned to be 70% to 75% efficient for new stores throughout the year. Half of our stores have already opened this year, and the performance has exceeded expectations. We'll see how it opens in the fall. But we are very optimistic about growth, including in the Tohoku region. You also mentioned store size—we didn't actually change the size of the store, but it depends on the specific location. Sometimes we have a larger area than average, sometimes smaller. We're excited about the expansion opportunities.
Adrienne Yih-Tennant
Barclays Research Division
Very good. I would also like to congratulate you. Very excellent quarter. My first question is have you seen any shift in clearance inventory sources between retail partners and wholesale suppliers? Second, can you talk about which categories — clearly home performance is good, and beauty is also good — are you seeing increased competition in some categories, or what categories do you think you are underpenetrating and can be more competitive in the competitive landscape?
James Conroy
Chief Executive Officer and Director
Of course. There are no noticeable changes to the first part of your question. The clearance opportunities are very strong. But we do see some categories that we think can grow, that we think are at the right level, or that we don't have enough penetration compared to certain discount competitors. So we're driving more growth in some areas. I don't really want to reveal which ones. But it's something we've been watching — our share of business in each category, and how we think it compares to other peers.
Regarding product competition, there is indeed such a factor in discount retail. However, the supply is adequate. A large number of items have been cancelled. So as you see some current weakness in mainstream retail, and large numbers of products become available, we expect this to continue. As a result, we'll get our fair share, and our competitors will get theirs. Ultimately, discount retail is likely to remain a winner, and we want to lead this sector.
Adrienne Yih-Tennant
Barclays Research Division
Very good. My follow-up question is slightly more general. As you think about how artificial intelligence and agency search can more accurately guide consumers to where they need to buy, how do you think this will affect discount retail in the long run?
James Conroy
Chief Executive Officer and Director
Look, artificial intelligence is everywhere. It's being discussed in every conference room and every board of directors across the country. So it's important to us. Of course, long before I got here, Michael and the IT team started investing in the foundational data elements we needed to rely on to integrate artificial intelligence. As we advance our business across all functions, we look at ways to further enhance any new process or system application with artificial intelligence.
This could be analysis or any planning and allocation work we're doing. Of course, software developers use it every day. What we're unlikely to do — we've seen other companies do this — is to set up a separate, completely separate functional department within the organization that only does artificial intelligence. We prefer to integrate it into the way we run our business. As such, it will be an enhancer of our operations.
I'm sure we'll be asked this question in the future. I can tell you that I'm personally very optimistic about artificial intelligence, but I also see huge opportunities. As long as we do our basic skills, continue to improve the customer experience, improve our product portfolio, and continue to drive sales growth, artificial intelligence is just the icing on the cake.
Krisztina Katai
Deutsche Bank Research Division
Congratulations on a fantastic quarter. I remember you used the phrase “excellent report card” when describing your new customer base. Can you talk about which metrics or dimensions surpassed expectations the most?
Second, Jim, when you mentioned that it's still in the early stages, I remember you saying that some initiatives have been rolled out nationwide, some are only in certain stores, and some are only in certain categories. So taking a step back, what percentage of stores are currently operating according to this new strategy? If you could help us frame the scale of the opportunity.
James Conroy
Chief Executive Officer and Director
OK. I'm trying to clarify both of these questions because it probably sounds like I haven't made it very clear before. Regarding the first part, I think I'm saying -- or what I'm trying to say -- the metrics are very strong from a customer perspective. I'm referring to the four dimensions. First, are you seeing acquisition from new customers — that is, people who have never shopped at Ross? Yes, we saw it.
Second, we've also seen customers who have shopped with us in the past but may have been away for two or three years and are now coming back. We're seeing year-over-year growth in this group. We can then measure how often our existing customers shop — we see them shopping more often — and the amount of their shopping basket grows, so they all spend more money. This is the transcript I'm talking about.
Additional to this part of the question: New customers have very similar characteristics to existing customers — they cover different age groups, income levels, and ethnicities, and are essentially a mirror image of the existing customer base.
As to the question about initiatives, I think that's more of a conceptual answer. But if we think about it — we have a list that can be divided into the three dimensions of products, stores, and marketing, but there are other aspects, right? Human resources, supply chains, there are countless things going on. Some we've tried and it worked. Michael spoke about the company's testing and learning capabilities a few minutes ago. So sometimes we say -- occasionally -- “This is a great idea, let's just promote it.”
Many times we say, “This idea might work; try it at 200 stores first.” This testing and learning team — essentially one of our departments here — consists of extremely good and smart people who will come back in 4, 6, 8 weeks and say, “We've seen these results.” If we're happy with the return, expand it. If it's an obvious success, spread it to all stores. If you want to know more, expand to half of the stores. So it's hard to say “go to store 1229 and you'll see everything” because every store is slightly different — different in size, in a different type of shopping center, etc.
Therefore, all of the initiatives we are promoting have slightly different performance depending on the store, store location, and the product category to which we may be doing belong. So it's not easy to say “this is the standard 'New Store' template. With all the features, you'll see all the new marketing and new brands” — that's not the case. This is a series of things that are progressing gradually over time.
Aneesha Sherman
Bernstein Agency Services
I'd like to ask about strategies to increase in-store inventory. We've seen some signs of overall weakness among American consumers. If consumer trends do slow down a bit and maybe start to see a slowdown in turnover, how do you assess the risk of higher inventory strategies?
And then a quick follow-up question, Jim, about what you just mentioned — new customers are demographically very similar to existing customers. When you look at customer surveys or performance by store, do you think there is a share shift within discount retail? Or are these new customers entering the discount channel from mainstream retail?
Michael Hartshorn
Group President, Chief Operating Officer and Director
Aneesha, you're right about inventory. We did hold higher levels of inventory at the store level this quarter, in part to support stronger consumer demand. Despite our high inventory levels, our in-store turnover is still very strong. At the same time, we have achieved higher product margins. Regarding inventory levels, our clearance levels have historically been low and are still low. The key for us is to keep our procurement budget flexible; we will always be able to take advantage of clearance opportunities in the market, or we have some flexibility to adjust inventory levels if demand falls back.
James Conroy
Chief Executive Officer and Director
Yes, I agree with Michael, and we've seen an increase in product margins over the past two quarters. So I don't think there's any real risk to the current inventory situation.
Regarding share transfers within discount retail — I think there are two ways to respond. First, try not to be arrogant — just mathematically speaking, we've grown faster than our other two peers in the past four quarters. So mathematically, we got a bigger share. In other words, we now have a larger share of the discount retail market than a year ago because we are growing faster.
I don't think we can comment on whether our business has impacted one or two other discounters in particular. They are all very powerful companies, and they all run very well. We compete with each other, but we're also getting our share from many other areas of the retail industry. So in a way, we want discounted retail to win, and we want to be a slightly bigger winner. So I can't comment on whether we specifically affected which of the other two families — one was much older than us, and did a really good job. So I'm not really worried about this.
Marni Shapiro
The Retail Tracker
Just in time, congratulations. I have a few quick questions. I've always been really impressed by your Instagram, very funny and youthful. Do you have data that shows this is attracting younger consumers? I think we can assume that, but I'm curious if you guys have data. Also, will you increase your marketing investment in the second half of the year and 2027?
James Conroy
Chief Executive Officer and Director
On the data side, as you can imagine, we continue to dive deep into the data. We have strong signs that our marketing efforts — including creative content and media combinations — are driving traffic, including younger customers. I pause sometimes because I think people often equate “posting a post or Reel” too directly with “increased sales the next day.” I think we're building a brand to some extent.
Regarding marketing investment, yes, as the business continues to grow, we plan our marketing budget in proportion to sales. Therefore, we will have some additional investment in the second half of the year because we plan to do business in the second half of the year on a larger scale than last year. In terms of sales share, we may see a slight increase, but it depends.
Marni Shapiro
The Retail Tracker
Very good. And one more question. You mentioned the World Cup. Now we're back to school season. I was wondering if the team is being more active in laying out the layout around these festivals and events. It seems like these are times when consumers — all income groups — go shopping, especially in the past few years. I wanted to know not only about the back-to-school season, but also Halloween, Valentine's Day, graduation season, Mother's Day — all the events throughout the year. Has there been a change in thinking about this?
James Conroy
Chief Executive Officer and Director
I think I agree. The concept of activity-driven in-store sales has been around for a few years. I think we did a good job. I know every chief procurement officer is further honing this ability. I wouldn't call it a drastic change in strategy or direction; it's probably just a slight increase in each activity. But we're lucky --
When I was preparing for this call, I happened to be looking at the comparable data from one week to the next, and they were quite stable. That's not to say we have a sharp spike in comparable growth around one activity week, then fall back, and then resume until the next event. The interesting thing is — if people notice — the back-to-school season could be a little later or longer, given the Labor Day date change. But I think we've strongly implied to some extent that our current business is also very strong.
Marni Shapiro
The Retail Tracker
So you guys haven't seen the ups and downs that some other retailers might have between the holidays?
James Conroy
Chief Executive Officer and Director
Correct.
Marni Shapiro
The Retail Tracker
Or to the extent that it doesn't need to be specified in particular?
James Conroy
Chief Executive Officer and Director
Let me tell you, I looked at the data for the last four weeks of July — the comparable growth figures for the four weeks were almost exactly the same. There aren't many major events in July, and the end of the month is probably close to back-to-school season. But we didn't see a comparable increase around Mother's Day and Father's Day — the dates of Father's Day did change — and then fell back to the lower single digits and then back to the middle double digits. This is not the case. Although sales may change during the event week, the year-on-year comparable growth we saw was very stable from week to week.
Marni Shapiro
The Retail Tracker
That's great. It's good to be stable and plain. Congratulations to all of you. Good luck with the back to school season.
Robert Drbul
BTIG Research Division
I'd like to ask two questions. First, when you consider the increase in new suppliers and changes in your business, has your combination of good, better, and best price points changed significantly compared to the company's historical level? Second question, I'd love to hear what you think of DD's business—where you think it is and the opportunities you see, especially in relation to the Ross department's performance.
James Conroy
Chief Executive Officer and Director
The quick answer about the price point — good, better, best — is that we haven't seen a major shift. In fact, we made a deliberate effort to maintain a good price point because that was our basic market. We recognize that in the current environment — many retailers are under pressure, and many discount retailers are under pressure — it would be quite unwise to adopt a strategy to improve the product portfolio and significantly increase the price point at this point in time.
DD's is in a very good location. I mean, we're talking about better, better, and best within Ross; DD's price points are below these. We're not going to split their results separately, but they've also been very strong this quarter. In terms of a one-year term, it's not as strong as Ross, but in terms of a two-year period, it's almost exactly the same as Ross. So Karen and Ken Margulies and their colleagues have done a fantastic job running this business.
So we definitely want new, better brands, national brands at all price points. Sometimes they are slightly more expensive, but that's not always the case. We take great care to ensure we don't exceed what our customers can afford, especially in the current environment.