Off-price apparel retailer Ross Stores (ROST, Financial) delivered a strong Q1 report, overcoming macroeconomic challenges that impacted low-to-moderate-income customers. The company posted a double-digit earnings beat, moderate revenue outperformance, and decent quarterly guidance, similar to the previous quarter.
- ROST's +3% comps in Q1, hitting the high-end of its +2-3% outlook, surprised investors positively. Shares had dropped over 10% since March, offering room for a rebound even if Q1 results weren't exceptional.
- ROST expanded its top line by 8.1% year-over-year to $4.86 billion, driven by increased traffic. The company also saw a 34% improvement in EPS to $1.46, thanks to lower distribution, incentive, and freight costs, which boosted operating margins by over 200 bps year-over-year to 12.2%.
- Merchandise margins fell by 15 bps year-over-year, partially offsetting logistical cost benefits. This aligns with ROST's strategy to offer more sharply priced brands to attract higher-income shoppers trading down amid inflation. Branded merchandise typically carries lower margins, slightly impacting overall margins. ROST expects this pressure to continue throughout the year.
- ROST raised its FY25 EPS forecast to $5.79-5.98 from the previous $5.64-5.89 outlook. Although the FY25 comp growth forecast of +2-3% remains unchanged, this is seen positively given the challenging economic environment.
The higher cost of living benefits off-price retailers as higher-income demographics trade down to manage their budgets. This trend is evident with TJX (TJX, Financial), which reported healthy comp growth in AprQ. While inflation keeps near-term uncertainty high, ROST's prudent guidance approach positions it well to capitalize on the trade-down effect, making pullbacks attractive entry points.
Watch for upcoming AprQ results from industry peers: Burlington Stores (BURL, Financial) on May 30, Dollar Tree (DLTR, Financial) on June 5, Ollie's Bargain Outlet (OLLI, Financial) on June 5, and Big Lots (BIG, Financial) on June 6.
