Key Highlights

● Second-quarter sales were about $6.3 billion, up 13%.

● Comparable store sales rose 10%, driven primarily by higher customer traffic.

● Tariff refunds of about $253 million added roughly $0.60 per share.

● Ross raised its store opening plan to 115 new stores for the year.

Ross Stores (NASDAQ:ROST) reported one of the strongest quarters in the off-price sector this season. Sales for the quarter ended in early August were about $6.3 billion, up 13%, and comparable store sales rose 10%, a gain management attributed primarily to higher customer traffic. Chief executive Jim Conroy described the quarter as one of stellar sales and Earnings growth.

Earnings were boosted by a one-time item. Ross recorded about $253 million of refunds of tariffs collected under the International Emergency Economic Powers Act, which added roughly $0.60 to Diluted Earnings per Share and about four points to operating margin. Even without the refunds, Operating Margin rose by two points, above the range the company had planned.

What were the main results for the quarter for Ross Stores?

Net sales were about $6.3 billion, compared with $5.5 billion a year earlier. Comparable store sales rose 10%. For the first six months of the fiscal year, sales rose 17% to about $12.3 billion and comparable sales rose 13%.

Operating earnings were about $1.1 billion, including the Tariff refund. Net earnings were $851 million, versus $508 million a year earlier. Diluted earnings per share came in at $2.66, against $1.56 in the prior-year quarter and guidance of $1.85 to $1.93.

Excluding the refund, operating margin still improved by two points, which was above the planned increase of between one and a third and one and a half points.

Why does customer traffic matter so much in this report?

Management said the comparable gain came mainly from more shoppers visiting stores, rather than from higher prices or larger baskets per visit. Traffic-driven growth tends to be viewed as the healthier kind, because it points to the retailer's ability to attract and retain customers.

The company said gains came from new shoppers, from lapsed shoppers coming back, and from existing customers visiting more often and spending more on each trip. That list covers each of the usual routes to traffic growth.

It also said the gains spread across household earnings levels, age groups and ethnicities, including younger shoppers. Broad-based growth of that kind is less fragile than growth that depends on one demographic or region.

The company did not publish a customer survey in the release, so the description rests on management's own account. Independent confirmation will come from later traffic data and from the quarterly reports of competitors that serve the same shoppers.

Which categories and regions led?

Home and cosmetics were the strongest categories according to the call, and the Midwest led among regions. dd's DISCOUNTS, the company's lower-price banner aimed at households with lower earnings, also performed well.

July was the strongest month of the quarter, which means the sales pace was accelerating into the third quarter. The company has guided to continued, if somewhat lower, comparable growth for the coming periods.

Recent store openings in the Northeast were also reported as running ahead of expectations. The Northeast is a newer region for Ross, where the Brand is still gaining familiarity with shoppers.

How did the tariff refunds shape earnings?

The refund of about $253 million is included in both the quarter and the six-month results. It added about four points to operating margin and about $0.60 to earnings per share, which means that without it, per-share earnings would have been about $2.06.

That adjusted figure still topped the guidance of $1.85 to $1.93, according to the release, so the quarter was strong on an underlying basis too. The company's full-year earnings guidance also contains the $0.60, so the stated ranges are not purely operating.

Other off-price and big-box retailers reporting around the same time booked comparable refunds. Readers comparing earnings across companies should check each presentation for how the item is handled. The same applies to year-over-year comparisons within Ross itself, since the prior-year quarter contained no comparable item and the reported growth in earnings per share is therefore flattered by the refund.

What is the guidance for the rest of the year?

For the third quarter, Ross expects comparable store sales to rise 6 to 7%, total sales to rise 9 to 11%, and earnings per share of $1.75 to $1.83. It expects operating margin of 11 point 7 to 12%.

For the fourth quarter, comparable sales are expected to rise 4 to 5% against a 9% gain a year earlier, with earnings per share of $2.17 to $2.26. For the full year, diluted earnings per share are expected to be $8.61 to $8.77, including the refund benefit.

The pace of comparable growth is expected to slow, which is a natural result of tougher comparisons with the prior year and of the one-time boosts to the first half.

Why did Ross raise its store opening plan?

The company opened 47 stores in the quarter, 35 Ross Dress for Less and 12 dd's DISCOUNTS, bringing the total to 2,328. It then raised its opening plan for the year to 115, about 90 Ross and 25 dd's DISCOUNTS, from 110.

For the third quarter alone, the company expects to open 51 stores, 41 Ross and 10 dd's DISCOUNTS. In addition, it plans five to 10 relocations and closures in the year.

The long-term model assumes about 5% annual unit growth, which is consistent with the faster pace now planned. Store openings also bring pre-opening costs, hiring and distribution adjustments, so the company sets its margin expectations with those expenses in mind. A year with a larger opening class, such as this one, therefore carries somewhat more upfront cost, even as the sales base broadens across new markets. New locations typically take a few years to mature, so openings made now will contribute more fully in later years.

How did the company handle pricing and sourcing?

Management said it has added vendors and brands and is gaining access to more popular names, while keeping prices value-oriented. Mr. Conroy said the company absolutely wants to have the best values in its stores.

The company expects modest, low-single-digit increases in average unit retail prices in the second half. That is a small change, in line with an approach of protecting the price gap between Ross and full-price competitors.

A broader brand selection is a central lever for off-price chains. When more name-brand goods are available at attractive costs, the chain can improve the quality of its assortment without raising prices.

The uncertainty for this approach is that Supply can tighten if brands manage production more carefully, a point management did not flag. For now the company reports that vendor relationships are widening, which supports the assortment goals it has set for the year.

Who is the Ross customer, and why does value matter?

Ross Dress for Less caters to moderate-earning households looking for brand-name apparel, footwear and home goods at prices well below department store levels, while dd's DISCOUNTS aims at households with lower earnings. The two banners serve different shoppers.

A value-focused chain tends to gain when consumers become more careful about spending, since shoppers trade down from full-price stores. The company said, however, that the gains in this quarter were broad, reaching customers across household earnings levels and age groups, which points to appeal beyond the core shopper.

Younger shoppers were specifically mentioned. Attracting them matters because shopping habits formed early tend to persist.

How does the fiscal calendar affect the comparisons?

Ross reports on a calendar that ends each quarter on the Saturday closest to the end of the month, so the second quarter finished on the first of August. Its fiscal year ends in late January or early February, which places the holiday period in the fourth quarter.

Because the first half was so strong, with comparable sales up 13%, the second half faces tougher comparisons. That explains why the guidance for the fourth quarter calls for a comparable gain of 4 to 5%, measured against a 9% gain in the same period last year.

The effect of the tariff refund is concentrated in the second quarter, which means the second-half earnings per share comparisons are against a base that did not include any refund. Readers should therefore look at the guidance figures for the third and fourth quarters separately from the full-year total.

What did management say about the underlying strength of the business?

Mr. Conroy said the underlying metrics are extremely positive across the board and that the company is still early in realizing its growth initiatives. Those initiatives include improvements in merchandising, the expansion of store count, better Marketing and the work to widen the brand assortment.

The remark is a statement of management's view, and it is not a measurement. The measurable parts are the traffic-led comparable gain, the margin expansion excluding the refund, and the stronger sales pace in July, all of which the company has reported.

Readers can compare the pace of change in merchandising and store growth with earlier years by consulting prior releases.

How do tariffs still matter beyond the refund?

The refund is a recovery of past duties and is not a sign that tariffs have vanished. Imported goods still make up a share of the assortment, and the company has to decide how much of any cost increase to pass on to shoppers and how much to absorb.

Management said it expects low-single-digit increases in average unit retail prices in the second half, which indicates a limited pass-through. Off-price merchants also have flexibility because they can shift orders among suppliers and lean on closeout goods whose tariff costs were already absorbed upstream.

Any further refund would depend on legal and administrative steps outside the company's control, and the release does not point to one. That uncertainty is a reason to focus on the adjusted figures when judging trend.

What does the inventory figure show?

Consolidated inventory rose 18%, which is faster than sales growth. Packaway, the stock acquired early and stored for later release, made up 36% of the total, down from 38% a year earlier.

Management said in-store turns remain strong and clearance levels are low, which indicates that goods are moving through stores rather than piling up. The larger inventory also reflects a larger store base and preparation for the faster third-quarter openings.

Inventory growth faster than sales deserves attention in any retail report, and the release leaves it to readers to watch whether the pace converges with sales in coming quarters.

Packaway offers flexibility because it lets a merchant seize closeout deals when they appear, then release the goods later. A lower packaway share, as reported here, means a larger portion of the stock is current-season product that is already on the sales floor or about to be placed there.

How is Ross spending money on its own stock and dividends?

The company spent $319 million in the quarter acquiring about $1.4 million of its own shares under a two-year program worth $2.55 billion. It said it remains on track to spend $1.275 billion on that program in the fiscal year.

Dividends paid over the first six months were $286 million. The release did not announce a new Dividend declaration, which the company usually does in a separate announcement.

Readers following Retail Stocks will see that these programs are modest relative to operating cash flow, which leaves room for the Capital spending that the faster store openings require.

Where does the company sit in the market for Ross Stores?

Ross is a member of the S&P 500 and trades on the Nasdaq. It competes in off-price retail with TJX Companies, which runs T.J. Maxx and Marshalls, and with Burlington, and indirectly with discount general merchandisers and department store clearance channels.

The comparable growth in this quarter was above the pace TJX reported for its consolidated Business in the same period. The two companies report on slightly different fiscal calendars, so comparisons are approximate.

Ross has historically shown wider swings than its peers in comparable growth, partly because of the concentration of stores in a few U.S. regions. The expansion into the Northeast is part of an effort to broaden that base.

What should readers watch next for Ross Stores?

The third-quarter report is expected in November, with the exact date on the company's calendar. The company has guided to a still-strong comparable gain, so the key question is whether traffic momentum carries into the holiday season. Management said the underlying metrics are strong, and the third-quarter guidance is the most direct statement of how it expects the period to go.

Inventory, the pace of openings and the margin effect of the new stores are the other items likely to come up. The company's comments on pricing and tariffs will also be watched, since refunds and the continuing tariff regime both affect costs.

It records what the company reported and said and is meant as background for anyone reading the next release.