Ross Stores Stock

Good afternoon, and welcome to the Ross Stores Second Quarter 2026 Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call will contain forward-looking statements regarding expectations about future growth and financial results, including sales and earnings forecasts, new store openings and other matters that are based on the company's current forecast of aspects of its future business. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from historical performance or current expectations. Risk factors are included in today's press release and in the company's fiscal 2025 Form 10-K and fiscal 2026 Form 10-Q and 8-Ks on file with the SEC.

Now I'd like to turn the call over to Jim Conroy, Chief Executive Officer.

Thank you, Diego, and good afternoon, everyone. Joining me on our call today are Michael Hartshorn, Group President and Chief Operating Officer; Bill Sheehan, Executive Vice President and Chief Financial Officer; and Connie Kao, Senior Vice President, Investor Relations. Before discussing our results, I want to recognize the outstanding team across the company and throughout the country. The robust sales and earnings growth in the quarter are a direct reflection of your hard work and commitment to the Ross organization. Thank you.

Now turning to our results. We are extremely pleased with the 10% comparable store sales growth we delivered in the second quarter, marking the second quarter in a row with double-digit comp growth. Sales were strong in May and improved sequentially each month with July delivering our strongest performance despite cycling a strong back-to-school performance last year. Customer traffic once again served as a primary driver of our comparable store sales increase, which underscores the durability of our growth and the momentum we are building. We believe the increased traffic reflects the effectiveness of our customer acquisition efforts.

During the quarter, we saw gains from new and lapsed customers, along with more frequent trips and higher spending from existing customers, reflecting deeper engagement with both of our chains. Importantly, the new customers we are attracting span a broad range of income demographics and age cohorts, including younger shoppers, 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. Once in our stores, both new and existing customers are responding to our compelling values and a broader selection of fashion and brands. The merchants and planners have done a terrific job of opening new vendors and satisfying the demands of a wide variety of customers.

Finally, our stores organization has done an excellent job enhancing the in-store shopping experience and managing the elevated sales volumes. We feel great about the early success of our growth strategies and have confidence in our ability to continue to gain market share. Consistent with the trends we saw in recent quarters, the strong performance at Ross was broad-based across both merchandise categories and geographies. In the second quarter, home and cosmetics were our strongest businesses. By geography, we saw strength across all markets with the Midwest performing the best. dd's DISCOUNTS also delivered solid sales and saw similar broad-based performance across merchandise areas and geographic regions.

Turning to inventory. Consolidated inventories at quarter end increased 18%. Packaway represented 36% of total inventory compared with 38% last year. We are leveraging our inventory position to not only meet the demand of higher customer traffic in our stores, but also to broaden our merchandise offerings on the selling floor across our store base. These efforts are leading to higher sales and improved merchandise margins while maintaining fast inventory turns. We are pleased with both the level and composition of our inventory and continue to have plenty of flexibility to capitalize on closeout opportunities as we enter the fall season.

Turning to store growth. We are now planning to open 115 locations in 2026, up from 110 in our prior guidance. We are particularly encouraged by the strength of our recent openings in both existing and newer markets, giving us added confidence in our ability to continue to grow our store base over time. Our plans also contemplate approximately 5 to 10 store relocations and closures. Overall, we remain confident that the actions we are taking across merchandising, marketing and stores are enhancing the customer experience and driving strong performance.

While the results to date are encouraging, we believe we are only beginning to realize the full potential of many of our initiatives. Our sustained sales performance reinforces our confidence that our more growth-oriented approach is resonating with customers. The team is energized by the opportunities ahead, and we see significant runway to build on the current momentum and drive continued sales gains over time.

Now Bill will provide further details on our second quarter results and additional color on our outlook for the remainder of the year.

Thank you, Jim. Building on our success from the first quarter, we reported very strong sales and earnings results for the second quarter. Total sales for the period grew 13% to $6.3 billion, with comparable store sales increasing 10%. As Jim mentioned earlier, the double-digit comp growth was primarily driven by an increase in the number of transactions. Gross margin improved by 625 basis points, driven primarily by 405 basis points of tariff refunds. Merchandise margin increased by 110 basis points, while distribution costs were lower by 100 basis points given favorable timing of packaway-related expenses, higher productivity and as we anniversaried last year's tariff-related processing costs.

In addition, occupancy costs leveraged by 25 basis points. Partially offsetting these benefits were buying costs, which deleveraged by 5 basis points from higher incentives and an increase in freight costs of 10 basis points due to higher fuel prices. SG&A for the period deleveraged by 15 basis points due to higher incentives given the earnings outperformance. Second quarter operating margin increased 610 basis points, which included the aforementioned 405 basis points from tariff refunds. Excluding this benefit, operating margin increased 205 basis points compared to the prior year.

Second quarter net income was $851 million compared to $508 million last year, and earnings per share were $2.66 compared to $1.56 in the prior year period. Sales for the first 6 months of 2026 grew 17% to $12.3 billion, up from $10.5 billion in the prior year. Comparable store sales for the first half of 2026 were up 13% and earnings per share were $4.69 compared to $3.03 for the first half of 2025. As a reminder, both the second quarter and first 6 months results in 2026 include $253 million or approximately $0.60 in earnings per share of tariff refunds.

Now to our shareholder return activity. As noted in today's release, we repurchased approximately 1.4 million shares during the quarter for an aggregate total cost of $319 million under the 2-year $2.55 billion authorization approved by our Board of Directors in March of this year. We remain on track to buy back a total of $1.275 billion in stock during 2026.

Now let's discuss our outlook for the remainder of 2026. As noted in today's press release, we exited the quarter with building momentum, and we are excited about the plans we have in place as we enter the fall season. Despite facing significantly more challenging year-over-year comparisons in the back half of the year, we are raising our outlook for both the third and fourth quarters. Comparable store sales are now forecasted to increase 6% to 7% in the third quarter, with earnings per share expected to be in the range of $1.75 to $1.83, versus $1.58 last year. Our guidance assumptions for the third quarter of 2026 reflect total sales are forecast to increase 9% to 11% versus the prior year.

If same-store sales perform in line with our forecast, operating margin for the third quarter is planned to be in the range of 11.7% to 12.0% compared to 11.6% last year. Our forecast reflects leverage from the expected comp store sales increase as well as slightly higher merchandise margins. Partially offsetting these benefits are higher freight costs given the increase in fuel prices. As mentioned earlier, we raised our new store opening plans for the year and now expect to open 51 stores during the third quarter, including 41 Ross and 10 dd's locations. Net interest income is estimated to be approximately $30 million. The tax rate is projected to be about 25%, and diluted shares outstanding are expected to be approximately 319 million.

Moving to the fourth quarter. Comparable store sales are now expected to increase 4% to 5% on top of a robust 9% increase last year. Earnings per share are planned to be in the range of $2.17 to $2.26 compared to $2 for the same period in 2025. The second half of 2026 performs in line with these projections, earnings per share for the full year are now forecast to be in the range of $8.61 to $8.77, versus $6.61 last year. Included in this year's forecast is approximately $0.60 of earnings per share from tariff refunds.

Now I'll turn the call back to Jim for closing comments.

Thank you, Bill. We delivered robust first half results and remain encouraged by the positive trends we are seeing across the business. While we are pleased with the progress we have made over the last several quarters, we remain focused on building on that momentum. The work underway across the organization is centered on continuing to strengthen our brand relevance, delivering world-class merchandise assortments and further improving the in-store experience. We believe we have only begun to tap into the full growth potential of the business.

At this point, we would like to open the call and respond to any questions that you may have. Diego?

[Operator Instructions] And our first question comes from Matthew Boss with JPMorgan.

Congrats on a really great quarter. So Jim, could you elaborate on the build in top line momentum that you saw across the second quarter and drivers of this exit rate strength? And just despite the tougher comparisons, could you speak to the opportunity you see remaining in the back half of the year and beyond across the assortment, marketing and in-store execution?

Sure. Happy to. The quarter was really solid, and we're thrilled by not only the underlying growth number, the 10% comp, but the quality of the comp. It's really driven mostly by more transactions. Those transactions are driven by customer capture, both new and regaining lapsed customers. We're seeing existing customers shop more frequently. We're seeing all customers spend more. So from a -- the customer KPIs are just extremely solid. The merchandise KPIs are also solid. So we've seen broad-based strength across all merchandise categories in both chains, Ross and dd's. The geographic metrics are equally strong. So we've seen broad-based strength across the country.

As we went through the quarter, we had a little bit of -- we felt World Cup a little bit in June. We saw a really strong July. And if you recall on our last year call, we talked about July had a very nice acceleration from June. So putting a strong July, a very strong July, which you could surmise had to be more than 10% if it was the strongest month of the quarter, up against a very strong July last year, the exit velocity was very, very good. We got into August, where we continue to be very encouraged by the current business and the momentum that's been building. Last year, August was the strongest month of the quarter.

So we continue to believe that we shouldn't be concerned about cycling strong comps. And on prior calls, we've talked about sort of 2 schools of thought. Can you comp the comp versus are you building momentum and can the flywheel continue to grow the business. Hopefully, after the fourth quarter of really strong comps and laying out the next 2 quarters of, we believe, pretty solid guidance, we can extinguish that concern because the underlying metrics that we see are just extremely positive across the board.

If you come all the way back to some of the initiatives that we started last year, they're all still in the early innings. And some of them have been implemented across the chain, but some are only in some stores. Some of them have been implemented across all merchandise categories and others are still waiting to be further implemented. And of course, we've also launched new initiatives. So I can't underscore enough that our outlook for the balance of the year continues to be extremely positive with a number of opportunities to continue the growth that we're seeing.

Your next question comes from Lorraine Hutchinson with Bank of America.

Jim, you just did a 10% comp and you're still talking about a lot of these initiatives being early stage. So can you talk a little bit about which of these initiatives you see having the most runway to continue to drive to this guided comp strength?

Sure. I'll talk at a relatively high level. One of the things I've learned is my natural propensity to provide more detail just exposes us to other retailers sort of picking up what we're doing and trying to emulate them very quickly. But with some desire to provide some transparency, let's anchor back to sort of merchandising stores and marketing, and I could list probably a dozen initiatives on each of those.

The merchant team has really done a great job of continuing to build great assortments, opening up new vendors and new brands, starting to tell better merchandise stories across categories. The stores team has -- if you -- I'd encourage everybody on the call to go to a store, and you'll see very well-organized stores, inventory being recovered quickly, queue lines are shorter. So the stores team has really been able to rise to the challenge of a pretty sharp acceleration in sales over the last year or so.

And then from a marketing standpoint, again, you can see what we're doing from a marketing standpoint, you can see our spots, you can follow us on social media. We're getting a tremendous amount of engagement with our new creative messaging. We've tweaked our media mix. But if I went through each of those points that I just made and the other dozen or so points that I haven't explicitly called out, there's no way you could believe that we fully executed and implemented all of them. So we sit and look at the business and just wake up every day with more ideas to continue to drive more growth.

Your next question comes from Corey Tarlowe with Jefferies.

Jim, the comp momentum continues to be very impressive and a lot of the work that we've done around marketing continues to show really strong momentum there. I'm just curious how you think about how the marketing is fueling new customer acquisition and whether or not these newer customers that you're acquiring are higher income in nature and the types of products that these customers are purchasing as well relative to some of the products that you had in your prior assortments?

Sure. The marketing team, both the creative team and the analytics team and the folks that are buying our media, I think, are doing a tremendous job and I'd circle back to you, but we're still learning, right? We still think there's some more opportunity for us to improve. We've absolutely seen brand-new customers come into the Ross and dd's that hadn't shopped with us in the past as well as recapturing customers that perhaps used to shop with us and they're returning.

The -- in terms of what the new cohort of customers look like, I couldn't describe a better report card, if I'm honest. We've seen -- the quick answer is our new customer and the profile of them as a group look very similar to the composition of our current customers, which would imply that we're seeing growth across every single household income group that we track, every single age group that we track and every single ethnicity. So it's been just a broad-based increase in customer capture across all dimensions, which is handy because that means that the proposition that we have in the stores that we already know works for our current customer, will work for sort of the new cohort of customer.

Does that answer your question?

Yes. It's very helpful. Best of luck.

Your next question comes from Chuck Grom with Gordon Haskett.

Jim, could you talk about your success over the past year and how it's translated into a stronger vendor flywheel, both in terms of new suppliers entering the mix, but also deeper relationships with existing vendors? And then my follow-up question is just on the lapsed customer opportunity. I don't think you brought that up in the past. Can you maybe just size that up for us?

Sure. Having only been here for a little over 18 months now, I continue to marvel at the strength and partnership that we have with the vendor community. And it's -- they're true partners and they're the lifeblood of our growth. The team, and this absolutely predates me, I'm learning off-price. The team under Karen and Karen in each of the divisions absolutely aim to be genuine partners and easy to work with our vendors, and I hear that all the time.

The partnership with our current vendors and bringing on new vendors, I think, ties to the same 2 or 3 things that are happening within the business. Number one, just our growth, right? We're continuing to post nice growth. I think any vendor appreciates that and maybe a rising tide rises -- lifts all boats. The second piece is some vendors that perhaps had been resistant to sell to off-price or maybe specifically to Ross in the past, now go to the stores and see that their product will be showcased and merchandised in a sort of neat and tidy way. And what the stores team has done in enhancing the shopping experience in store has probably further helped the experience with our vendors because they know that the product will be treated sort of with great care.

And then finally, I do hear oftentimes from our vendors as they see the change in the brand positioning that they believe it's a fun and exciting brand now, and they want to participate in it. So when you put all those 3 things together, I think the partnership with our existing vendors continues to be quite strong and the merchants and their persistence in trying to open up more and more brands has continued to become more successful.

I'm not convinced I answered both of your questions. Did I cover everything?

You definitely answered the first one. I was curious, you talked about a lot of the traffic being from new customers, but also from lapsed customers. So I just was wondering if there was a way to size up that opportunity and maybe how the team is going after those lapsed customers maybe a little bit more aggressively.

Sure. Let me just give you a little insight as we get -- how we get that information. We use a third-party credit card vendor. It's widely available on the market, but anyone would have to pay for it. So we can see credit card numbers that haven't been in the store in X period of time and then when they return, right? So that's how we're measuring it.

It's somewhat of a new muscle, where we are strategically prospecting for them from a marketing standpoint and how we're spending our money. And now we have an ability to measure it based on that credit card data, albeit it might be a little rough, it's certainly directional. And the goal, of course, is to show them just a world-class merchandise assortment once they get it in the store and have them have a great experience and encourage them to come back and come back more frequently, and we're seeing that as well.

Your next question comes from Paul Lejuez with Citigroup.

Jim, I'm curious if there's any way you can quantify for us the number of new customers that you're seeing on a year-over-year basis. How does it look in 2Q sales coming from new customers versus what you saw in 1Q? And kind of the same question on the vendor side. Any way to frame the number of vendors you're currently working with today versus, let's say, a year ago? How would you characterize the new vendors? Is there a common thread? And what is ultimately the right number of vendors to be working with?

Sure. On the vendor question, there are times when we're trying to invite in a stronger national brand into the store. And when they come in, there's occasion when it's a net new add, but there's also an occasion where they take the space from a vendor that perhaps is more tertiary in nature. So the vendor count wouldn't really get you there.

I think if you walk the store and look at the vendor brand plates that are in the store, you'll start to get a sense for not necessarily always higher price point vendors, but just the strength of the brands that we're carrying now, which honestly is just an extension of the brand strategy that started a few years ago.

In terms of the -- quantifying the customer capture, it would be hard to provide that much data. And I suppose it's a little proprietary also. But if you parse out some of the things we've said, a 10% comp, most of that was transactions. A small portion of it was an increase in basket. And of those transactions, it was a combination of brand-new customers, returning customers that used to shop with us and existing customers shopping more frequently. I wouldn't say it's 1/3, 1/3, 1/3 necessarily, but I would think of it in those 3 buckets.

So it's -- each of them are meaningful in their own right, meaning just the new customers that are coming, we're just recapturing the lapsed customers. We're just getting current customers to shop more frequently. And again, I think we can continue to find opportunities to do more of all of that.

Your next question comes from Michael Binetti with Evercore ISI.

Let me add my congrats on a nice quarter. I'll ask one and then if it's okay, I'll ask a follow-up after. But you've talked about a lot about vendor -- better vendor acceptance, stronger merchandise availability. As the sales and the store experience have improved, has that changed the quality of what each of these vendors is willing to offer you? Are you getting more access to the better and best side of the assortments? And more importantly, is buying in those higher-tier categories from these vendors more competitive with other off-prices than what you've seen in the past?

I didn't quite follow the second part of your question. The first part is, are we getting more vendors and even higher end or better quality product. What was the second part of your question?

Is it -- as you get access to the better and best side of the assortments, are you finding -- are the buyers finding those higher-tier categories with these vendors more competitive with other off-pricers?

I see. I think the answer to the first part of your question is, yes, we're getting more access to better brands, more popular brands, not necessarily always higher price point brands. And in terms of are they more competitive? I think all of the off-pricers and one of them has already reported, the opportunities from a supply side standpoint, from a closeout standpoint are -- they're outstanding. There's plenty of product to continue to fuel the fire. And I think we've always been competing to some degree for that next buy.

And we have some formidable competition out there. We're helped a little bit right now because of the outsized growth. So I think occasionally, we're getting the ability to open up vendors because we're growing more or one of our competitors may not want more product or need more product. So I think there's a number of factors. And we still have plenty of work to be done in front of us to continue to knock on doors and just be persistent with brands that we'd like to bring into the store to the extent that I'm calling vendors from time to time trying to open them up if I can.

And then if I could ask a follow-up. As you think beyond this year, which has been kind of remarkable, do you believe the business ultimately settles back into what we think of as a traditional off-price 3% to 4% algorithm on same-store sales? Or do the ongoing pilot and implementation of the initiatives that you talked about in marketing and merchandising, customer acquisition, do those support comp potential above that for another year? What would need to continue working for the latter to be true?

Michael, it's Michael Hartshorn. We're clearly pleased with the current performance and trend. And as Jim has said multiple times, many of the things that we're testing in store, testing and merchandising and even testing in marketing, they're very early stages. So we think we can certainly grow beyond where we're trending today and be able to comp on top of the very strong comps this year. I think from a -- is it time to update the long-term algorithm? I think the right time to do that would be further along in some of the initiatives we have in place. So at this point, we wouldn't update kind of the long-term year-over-year algorithm and hope to beat that long-term algorithm in the short term.

Your next question comes from Alex Straton with Morgan Stanley.

Perfect. Maybe, Jim, as you look forward, do those initiatives you've spoken to require a structurally higher level of investment to sustain that high comp growth? Or do you believe most of the investment is already reflected in the current cost structure? And I just have one follow-up.

This is Michael again. Within the cost structure, and you can see it in the results in the P&L, and from the capital structure. Clearly, we've expanded our unit growth, which that takes additional investment, but that's the best investment we can make in the company. Usually, that capital pays back in a matter of 2 to 3 years. In all the initiatives, the biggest impact you can have is across 2,300 stores. And we have very good test and learn capabilities.

So the investments we're making, we're first testing in pilot stores. And if it makes sense, it's going to make sense not only in the -- if it's a capital investment, it's going to make sense through the P&L. So despite the initiatives we have in place, we've been able to leverage store payroll this year. We've been able to leverage the SG&A as a whole. We'll continue to test if it works on the total P&L, we'll make the investment. And we've been very happy with how we've been able to manage putting these new initiatives in place and managing our capital and expenses.

Your next question comes from Brooke Roach with Goldman Sachs.

I had a follow-up on Alex's question, which is that given the success of each of these growth initiatives, are there any areas where you think you should lean in and increase the pace of these investments, whether it's marketing or otherwise? Maybe said another way, is there a change in your thinking about the typical level of flow-through that we should see per point of comp outperformance versus your guide?

Maybe I can start with that one, and Michael or Bill could add if necessary. We have been asked that question. Should we be doing even more? Could we drive even more growth? We're pretty pleased with the underlying growth that we have right now. And so demand generation hasn't been a huge challenge for us.

With all of these things working together and our flow-through -- one of the questions when we get ourselves organized to prepare for a call, we say, all right, well, sales have been really strong. What's our flow-through? And are we going to meet those expectations? And the answer to that question for the last 4 or 5 quarters has been yes. So for the time being, we're going to continue to work largely within the economic model that we have with the flow-through assumptions that are out there.

If -- I guess I would just signal if there was a point in time in the future where we thought we were going to overinvest or overclub something, betting on the come for future sort of longer-term value, I'd really like to bring that to the market before we just do it and then surprise you at the end of the quarter. So right now, with the exception of some small things here or there that have been subsumed in the growth that we're seeing, we're working within the financial construct of the business that's been in place for years now.

So yes, Brooke, I mean that same 10 to 15 bps per 1% of comp model still holds.

And your next question comes from Mark Altschwager with Baird.

Maybe first question, just following up again on the margin, maybe a little bit more near-term focused. I guess if my math is correct, I think the implied raise in the back half is a bit more than that 10 to 15 basis points as we look at just how much the earnings went up relative to the comp raise. I guess, is that right? And maybe what are the other factors affecting the flow-through assumptions in the back half? Aside from better leverage on higher sales, has anything changed in terms of your view on the margin puts and takes for the back half?

Yes. I think that back half, we're in line with the comp raise that we have there on the 6% to 7% to 4% to 5% comp raise. I think we're seeing that top line momentum, and we feel good about what's in place there. But our guidance reflects some of what we talked about there, higher merchandise margins, some lower DC costs. So it's in line.

Okay. And then maybe a bigger picture one on the competitive backdrop. A number of the large national chains are leaning harder into price investment this year in the back half of this year, reinvesting some of the tariff refunds. Given the acceleration through the quarter that you cited and the August trend, it doesn't seem like that's having an impact. But even so, how are you thinking about protecting the value gap in this environment? And what are your assumptions for ticket growth in the back half and how that might change as you maintain your competitive pricing?

Sure. Starting with the overarching premise that we always want to have sort of that pricing umbrella and be underneath mainstream retail. The second piece is one of the things, if you were to retroactively go back through the last 4 quarters, we were very hesitant to pass through AUR increases. So much so that we called out some impact to our earnings when tariffs first came to bear last year. So I think a lot of other retailers took a different position in trying to pass that along and maybe now sort of reversing course.

We've tried to maintain a little bit more stability. And in today's environment, today's inflationary economy, we absolutely want to have the best values in our store. And if that were to -- if we were to see something where we didn't have that price umbrella under mainstream retail, we would make a change. But I think we are still safe where we are now. For the back half of the year, you'll likely see some very modest AUR increases sort of at the same sort of levels that we're seeing now, low single digit.

And we really want to be there for a customer that's battling higher gas prices and all the other inflation pressures that they have in their life. So it's an important question. It's a strategic question. But I'm liking sort of the consistency of our pricing strategy right now. And I think as it stands, if we were to do some competitive price shopping, we would look very, very competitive.

Your next question comes from Ike Boruchow with Wells Fargo.

Let me add my congrats. I was wondering if we could dig into the back half margins. Just curious if you can maybe let us know what's going on in the gross margin within your plan for the third quarter and the fourth quarter? And then specifically, I know you called out freight as a 10 bps headwind in the second quarter. Does that worsen in the back half? Kind of what have you seen with contracts over the -- since the last time we heard from you? Just kind of curious how to think about the freight line within that.

Yes. Certainly, you saw that -- you heard the specifics on Q3. We will obviously provide more specifics on Q4 margin when we report the Q3 results, but we do anticipate merchandise margin will remain a tailwind and some benefit in DC costs. I think similar to Q3, we are projecting domestic freight to deleverage due to higher fuel costs.

And as you can surmise, that raised sales guidance in Q4 would imply some EBIT margin improvement versus last year. So on fuel, we don't hedge fuel cost. The biggest component of our freight is fuel. So if things are going to change materially on the fuel side from where they are today, that would have an impact. But we do have embedded in our guidance right now higher fuel.

Is that impact more detrimental in the third quarter and fourth quarter than it was in the second quarter?

I think it kind of depends what happens with fuel prices. We have our best estimate from where they are now. But again, it kind of depends on where it goes from here.

Your next question comes from Jay Sole with UBS.

Jim, I'm curious about trying to understand the comp trend a little bit better because it sounds like transactions was a big driver, which presumably means traffic. But a lot of the key initiatives like getting better brands, holding more inventory in the store, those aren't really traffic drivers, whereas like marketing, which would be a traffic driver or better in-store execution could drive transactions, but those stores sound secondary. Are we sort of missing the point that maybe the marketing is a bigger driver of traffic and some of the merchandise initiatives have yet to really show the results that you're expecting that you're starting to see? And maybe that's why you see only the beginning of the improvement at Ross being able to continue for longer term?

So it's a great question, Jay. Hopefully, we're being clear. I think all 3 pieces work together. The part we don't have great -- we have a great ability to parse out is if we see an increase in transactions, there are probably times when it's a customer that maybe was going to shop anyway and wasn't always going to buy, but now the assortment is great or the store looks better and now they get converted. And we can't connect that last piece of the arithmetic because we don't have traffic counters.

But I -- if you think about what's driving the traffic, I mean, the logical place to go is great creative, a great way of spending the media, and we're continuing to tweak our media mix and capturing sort of a whole cadre of customers, new and customers that used to shop with us and perhaps encouraging existing customers to come back more. Now there is a thesis and part of this is true, I'm sure, that there's an existing customer that had shopped with us with some periodic frequency. And now she comes in and she feels great about the assortment and the store looks better and she doesn't wait in the line as long. So now she's just shopping more frequently.

I can't fully or we can't fully attribute that to marketing efforts. It might just be a better experience that she is now shopping more frequently and potentially telling others. So we try to split it into 3 handy buckets, meaning marketing drives sales and the store experience and of course, the assortment converts -- sorry, marketing drives traffic and the assortment and store experience converts that traffic into buyers. But it's not quite that clearly delineated between the different pieces.

So I'm not sure I've answered your question, but we are absolutely challenging marketing to continue to fill top-of-funnel customers. That's working. We're challenging the merchants to bring the best assortments, continue to add new vendors. That seems to be working. And the store experience has absolutely improved, not only sort of anecdotally when we shop the stores, but we have metrics and customer survey instruments that are telling us that. So all of them work together, and we continue to call it sort of this flywheel or the virtuous cycle, and we're going to continue to try to roll that forward.

That's helpful. Jim, let me ask you one more, if that's okay. Just kind of want to help understanding how you're thinking about brand relevance because we all saw what happened at Boot Barn and how much brand relevance increased over a multiyear period. But can you just tie the importance of improving brand relevance of Ross to getting better brands in the store? How much are you making sort of that connection where it's not just about getting more consumers or a higher income consumer, but it's also about selling Ross to the vendors who are going to give you the products that you really want?

It's a very astute connection of 2 dots there, Jay. We want Ross and dd's to both resonate with consumers in their own right as brands. And the underlying proposition of both of them right now are very, very strong value orientation, and we don't want to lose that. We do think we can be more than that, and that's what we're trying to do. And you can see it in -- it's no secret, unfortunately, but you can see it in our Instagram posts, right? We will swing from product and value stories and posts, and then we'll push towards sort of more storytelling and creative stretches. And that's intentional, and it seems to be working.

And your next question comes from Dana Telsey with Telsey Advisory Group.

Congratulations and so nice to see the progress. As you think about the categories that you called out, Jim, cosmetics and home being strong drivers, last quarter, I think it was ladies and cosmetics. So cosmetics has been consistent. Any update on apparel or on ladies and how that performed? And then the uptick in the new store openings, any in the Northeast? Or where do you see them going? Where do you see them opening? And is the size at all different? And does the acceleration this year in new store openings, does it suggest that we could see an accelerated pace of new store openings going forward in future years?

Okay. I'll start and then Mike will do the stores piece. On the category growth, yes, let me just start off with the ones that you called out. Cosmetics was strong, Michael Kojundzija and [ Stephanie Leathers ], those -- that team -- [ Stephanie Leathers' ] team has done a really nice job quarter after quarter of growing that business. The home business was very strong in this quarter and to sort of play back the tape, that was a business that while growing, was growing slightly less than company average and is now -- we have kind of -- the home business is outpacing company average.

So we've seen particular strength in both Ross and dd's and even really unique strength in sort of the more fashionable parts of home, decorative home and housewares and with that growth in mid-teens. So hats off to Gurmeet and his team. From a ladies perspective, the ladies business continues to be very strong. We didn't call it out, so it's not one of the top 2, but you often kind of remind us of how that was part of the brand strategy, et cetera.

And in Q1, it was comp enhancing. In Q2, it's slightly below the company average, but pretty much in line. We've seen some nice growth in the younger parts of that business, particularly juniors. So that part of the strategy continues to be strong. But as I stare at a sheet of paper in front of me that, admittedly, I recognize you can't all see. It's just really encouraging to look down a column of numbers and see every single major merchandise category comping positive.

Dana, on real estate, the team has done just an outstanding job in really growing our pipeline and the intent is to grow that so that we have year-over-year, 5% unit growth is what's in our model. This year, we had -- these 5 stores that we added were stores that we're teetering on could we open them this year, get through the negotiations and construction or should we open them in spring of next year. And the team again did a good job, and they're ready to go this year. So that's really the increase.

In terms of where we're going, clearly, you see us entering the Northeast. We've been very happy with that performance. Our overall new store performance this year, we had planned the year around 70% to 75%. We have half of the fleet in place this year, and they're running ahead of that. So we'll see how the fall openings do. But we're very excited about growth, growth in the Northeast. You also mentioned store size. We really haven't changed our store size, but it's on a site-by-site basis. Sometimes we'll take on more real estate and sometimes less than the average. But we're really excited about our expansion opportunities.

Your next question comes from Adrienne Yih with Barclays.

Great. And I'll add my congratulations. Really great quarter. My -- I guess my first question is, are you seeing any shift in the inventory availability from closeouts at retail versus wholesale partners and vendors? And then secondarily, if you can talk about any categories, I mean, obviously, home has been great, cosmetics, beauty, et cetera. Are you seeing any categories that are becoming more competitive or that -- where you think you are underpenetrated and you can be more competitive in the landscape?

Sure. No meaningful shifts to the first part of your question. The closeout opportunities are very strong. But we do see categories where we think we can grow where we think we are underpenetrated relative to where we should be or relative to where some of our off-price competitors are. So there are certain places where we're pressing for more growth. I'd rather not sort of divulge specifically what they are. But that is something that we look at all the time, which is sort of what's our percentage of business by category and how do we think that compares to some of the other folks out there.

In terms of competing for goods, there's definitely a piece of that in off-price. However, the availability is strong. There's a lot of goods being canceled. So there's -- as you see some of the softness in mainstream retail right now, there's a lot of goods becoming available, and we expect that to continue. So we'll get our fair share. Our competitors will get their fair share. And off-price at the end of the day, will probably continue to be a winning sector, and we hope to be leading that sector.

Great. And then my follow-on question is a little bit of a higher-level question. As you think about how sort of AI and agentic search is going to be much more directed directing the consumer to where they need to purchase, how do you think that impacts off-price over time?

Look, AI is everywhere. It's in every conference room and every boardroom across the country. So it's going to be important to us. Of course, way before I got here, Michael and the IT team had already started investing in sort of the foundational data elements that we need to rely on to integrate AI. And then as we go function by function across the business, we don't look at any new process or any sort of system application without figuring out a way to enhance it further with AI.

So that could be analytics or whatever we're doing planning and allocation. Of course, the software developers are using it every day. What it's unlikely that we'll do, and we've seen other companies do this is stand up an entire separate functional area within the organization that only does that. We'd much rather have it integrated within how we operate the business. So it will be an enhancer to how we operate.

I'm sure we'll get questions on it in the future. I can tell you, I'm personally very bullish on AI, but I also see tremendous opportunity for us to just execute on sort of basic blocking and tackling and continuing to improve the customer experience, improve our assortments and continue to drive sales growth and AI could just be icing on the cake on top of that.

Our next question comes from Krisztina Katai with Deutsche Bank.

Congratulations on a really excellent quarter. So you described the new customer cohort as having, I believe you said the word exceptionally strong report card. Can you talk about the metric or the various metrics that have exceeded your expectations the most?

And then secondly, Jim, when you were discussing still being in the early innings, I think you said some initiatives have been implemented chain-wide, some in certain stores, some in certain categories. So when we sort of take a step back, like what percentage of stores are currently opening under this new playbook? If you could just sort of frame that up for us in terms of opportunity.

All right. Now I'll try to help clarify both of those because it sounds like maybe I wasn't crystal clear on either. On the first piece, I think what I said, or at least what I was trying to say is the performance indicators from a customer standpoint are extremely strong. And what I mean by that is the dimensions perhaps are -- there's 4 of them. One is, are you seeing customer capture from new customers, people that have essentially never shopped Ross before? Yes, we are.

We're also seeing shoppers that have shopped with us in the past and perhaps have gone away, and we haven't heard from them in 2 or 3 years, and they've returned. So we've seen that, and we've seen an increase year-over-year versus last year in that group. Then we can measure the frequency of our existing shoppers, and we're seeing them shop more frequently, and then we can see our basket go up, so they're all spending more money. So that's the sort of report card.

Rounding out that part of your question, the new customers look and feel very similar to our current customers. It's a diversity of age groups of income levels, of ethnicities. It's kind of a mirror image of the customers that are in the store already.

In terms of the initiatives, I suppose that was more of a conceptual response. But if you think of -- we've got a list, and we can break it into 3 buckets, merchandising stores and marketing, but there are others, too, right? HR, supply chain, there's a million things going on. And some things we've tried and they've worked. Michael, a few minutes ago, mentioned the test and learn capability that the company has. So there'll be something that we'll say -- occasionally, we'll say this is a great idea. Let's just roll it out.

Oftentimes, we'll say, this is an idea that might work. Let's put it in 200 stores. And that team within this test and learn is essentially a department here will -- of extremely talented, smart people will come back 4 weeks, 6 weeks, 8 weeks later and say this is what we're seeing. And if we feel good about the return, we'll expand it. If it's a no-brainer, we'll put it in all stores. If we want to learn a little bit more, we'll expand it to half the chains. So you -- it would be hard for us to say, go to store [ 1229 ], you'll see everything because every store is a little different. There are different sizes. They're in different types of shopping centers, et cetera.

So all the initiatives that we're rolling out kind of behave a little bit differently depending on the store, the store location, the merchandise category that we might be talking about if we're doing something from a merchandising standpoint. So it's not -- it's not easy to say, here's the "new store" prototype and has every bell and whistle and you'll see all the new marketing and all the new brands, it's not like that. It's a series of things that are all ramping up over time.

Your next question comes from Aneesha Sherman with Bernstein.

So I want to ask about your strategy of increasing in-store inventories. We're seeing some signs of a weaker U.S. consumer across the board. How do you think about the risk to a higher inventory strategy if we do see some softening in the consumer trend and perhaps if you start to see a slowdown in turns?

And then a quick follow-up, Jim, on your comment just now around new customers being very similar demographically as your current ones. When you look at customer surveys or performance by store, do you believe there's some share shift going on within off-price? Or do you believe these new customers are entering the off-price space from mainstream retail?

Aneesha, on inventory, you are right. I mean, we did carry store level inventory, higher store level inventory during the quarter, partly to support the stronger consumer demand. Despite that higher level of inventory, our in-store turns remained very strong. And at the same time, we delivered higher merchandise margins. With the inventory levels, we -- our clearance levels have historically been low. They remain low for us. I mean the key for us is to maintain flexibility in the open to buy, and we'll always be positioned to take advantage of closeouts in the marketplace or if there's a pullback, we'll have some flexibility to adjust the inventory levels.

Yes. I agree with Michael on that point, and we've seen merchandise margin increase in each of the last 2 quarters. So I don't really ascribe any real risk to our inventory position right now. From a share shift within off-price, I suppose there's 2 ways to respond. The first way, trying to not be immodest at all, just mathematically, over the last 4 quarters, we've grown stronger than each of the other 2 players. So mathematically, we've captured more share. So of the off-price retail market, we're a bigger piece than we were a year ago because we've outgrown them.

In terms of is our business uniquely impacting one or both of the other off-pricers, I don't think we can comment on that. They're both very formidable companies. They're both extremely well run. We're all competing against each other, but we're also capturing share from a whole bunch of other places in the retail industry. So to some degree, we want off-price to win, and we just want to be a slightly bigger winner. So I couldn't comment on whether we're specifically impacting either other 2 players and one of which is much bigger than us and does a truly world-class job. So I'm not terribly worried about that.

Your next question comes from Marni Shapiro with Retail Tracker.

Right in under the wire, congratulations. So I had a couple of quick ones. Just -- I've been very impressed with your Instagram, by the way, and I think it's a lot of fun and it's young. Do you have any data showing that it is driving in the younger consumer? I think we can assume it, but I'm curious if you have any data. And are you going to increase your spend in marketing in the back half and into '27?

So on the data front, as you can imagine, we are constantly poring through data. We have a pretty strong indication that our marketing efforts, both the creative and how we mix the media are driving traffic, including younger customers. I sometimes pause because I think people often draw too direct of a line between you run a post or post a Reel and the next day sales goes up. And I think we're trying to build a brand of a kind.

In terms of marketing spend, yes, as our business continues to grow, we plan our marketing as a rate of sales. So we'll get some increased spend in the back half because we had planned the business to be bigger than it was last year in the back half. In terms of rate of sales, we might see some slight escalation there, but we'll see how it goes.

Great. And then just one follow-up. You mentioned FIFA. We're now in back-to-school. I'm curious if the team is leaning a little bit more or plans to lean a little bit more into these holidays and events. It seems that that's when the shopper is coming out across all income levels, but definitely more so in the last couple of years. And I'm curious, it's not just back-to-school, but Halloween, Valentine's Day, graduation, Mother's Day, all the events during the year. Is there a change of thinking there?

I guess I agree. The concept of event-driven in-store selling, I think, has existed now for a couple of years. I think we have done a pretty good job. I know each of the chief merchants are trying to further hone that ability. I wouldn't call it a sharp change in our strategy or direction, maybe just doubling down a little bit on each of the events. But we've had the good fortune.

I was just looking in preparation for this call at weekly comps, and they're pretty consistent. It's not like we're comping massively around an event. And then falling off and then catching it all back up at the next event. It will be interesting with the later -- potentially a later back-to-school season if people have called that out given that Labor Day has shifted, if back-to-school extends longer or comes later. But I think we've somewhat strongly hinted that our business right now is pretty strong also.

So you're not seeing kind of the ups and downs between the holidays that some other retailers might see?

Correct.

Or not to the extent that you need to call it out, I guess?

I'll tell you this. I looked at the last 4 weeks in July, and they were almost exactly the same number in terms of comp for 4 weeks in a row. So there's not a lot of massive events in July, maybe at the end of the -- getting to back-to-school. But we are not seeing comps build massively around Mother's Day, Father's Day, Father's Day shifted, but -- and then fall back to low single digits and then come back up to mid-teens. It's just not operating like that. It's been on a year-over-year -- while the volume might change during an event week, the year-over-year comp that we're seeing has been pretty darn consistent each week.

Well, that's great. Stable and boring is a good thing. Congratulations. Best of luck with the back-to-school.

And our final question for the day comes from Bob Drbul with BTIG.

I guess 2 questions, if I could. I guess the first one is, when you think about the new vendor adds and what's happening in the business, is your mix of good, better, best shifting dramatically over historical years of the company? I guess the second question, I'd just love to hear your take on the dd's business, where you feel that is and the opportunity that you're seeing, especially as it relates to the performance of the Ross division?

The quick answer on the price point, good, better, best is we're not seeing a massive shift there. In fact, we're sort of planfully trying to maintain that good price point because that's kind of our bread and butter. We recognize that the environment that we're in right now, a lot of retailers are under pressure, a lot of discount retailers are under pressure, and it would sort of be a foolhardy strategy to take this moment in time to elevate the assortment and bring our price points up in a meaningful way.

dd's is in a great spot. I mean, we talk about good, better, best within Ross. dd's sort of tucks in beneath those price points. And they -- we don't split them out specifically, but they had a very strong quarter as well. On a 1-year basis, not quite as strong as Ross, but on a 2-year basis, almost exactly in line with Ross. So Karen and Ken Margulies and those folks are doing a really good job running that business.

So we absolutely want new and better brands, national brands at all price points. Sometimes they shade higher, but not all the time. And we're very, very cognizant to make sure that we're not overshooting our customer, particularly in the current environment.

Thank you. I'll now hand it over to Jim Conroy for closing remarks.

Very good. Well, thank you, everyone, for joining us today, and we look forward to speaking with you on our next earnings call. Take care.

Thank you. And this concludes today's conference. All parties may disconnect. Have a good day.

Good afternoon, and welcome to the Ross Stores First Quarter 2026 Earnings Release Conference Call. The call will begin with prepared comments by management followed by question-and-answer session. [Operator Instructions] Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call will contain forward-looking statements regarding expectations about future growth and financial results, including sales and earnings forecasts, new store openings and other matters that are based on the company's current forecast of aspects of its future business.

These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from historical performance or current expectations. Risk factors are included in today's press release and the company's fiscal 2025 Form 10-K and fiscal 2026 Form 8-Ks on file with the SEC.

And now I'd like to turn the call over to Jim Conroy, Chief Executive Officer.

Thank you, John, and good afternoon, everyone. Joining me on our call today are Michael Hartshorn, Group President and Chief Operating Officer; Bill Sheehan, Executive Vice President and Chief Financial Officer; and Connie Kao, Senior Vice President, Investor Relations.

Before we walk through the results, I would like to thank our associates for an exceptional first quarter. The entire organization contributed to the very strong performance. Our marketing team drove strong customer acquisition and engagement through a combination of creative messaging and changes to our media mix. Our merchants and planners delivered compelling assortments and worked tirelessly to secure product to feed the outsized demand. Our supply chain network stepped up their efforts to keep the stores and stock in a timely manner. And finally, our stores team executed extremely well in supporting the increased product flow and customer activity.

It was a remarkable group effort, and I couldn't be more proud of the teamwork demonstrated across the entire organization. Thank you to the entire team. I will now turn to our first quarter results. We delivered it in an outstanding quarter with total sales up 21% and earnings per share growth of 37%. The overall growth in total sales was driven by a very robust 17% increase in comparable store saves. While we attribute a portion of this growth to the increase in tax refunds, versus last year, we are quite pleased that the underlying fundamentals of our growth were extremely healthy.

The comp increase was primarily driven by a growth in transactions, and we saw healthy increases in customer count on a comp store basis across income levels, ethnicities, and all age groups, including the young customers. In terms of monthly cadence, the quarter started strongly as we transitioned well from the holiday selling season into spring supported by more balanced inventory levels that allowed us to drive strong demand in February where we've historically struggled. This trend continued with solid mid-teen comps for the balance of the quarter.

Performance at Ross was broad-based across both merchandise areas and geographies. While ladies and cosmetics were our strongest businesses, every major merchandise category posted comp growth in the teens or higher. Similarly, we saw strength across the entire country with the Midwest performing the best.

These discounts also delivered solid top line sales with strong performance across merchandise categories and geographic regions. Moving to inventory. Consolidated inventories at the end of the quarter were up 12%, and packaway represented 36% of total inventory compared with 41% last year. We are pleased with the overall level and composition of our inventory entering the second quarter.

Turning to store growth. We expanded into new and existing markets and opened 13 new Ross and 4 dd's DISCOUNTS locations in the first quarter. We continue to plan for 5% unit growth for approximately 110 new stores this year, comprised of about 85 Ross and 25 dd's. As usual, these numbers do not reflect our plans to close or relocate about 10 to 15 older stores.

Consistent with our performance in 2025, we continue to be encouraged by the strength of the store openings in both new and existing markets. Overall, we remain confident in our fundamental strategy to better connect merchandising, marketing and stores to create an improved customer experience. While the initial results are quite encouraging, we believe we are still in the early stages with many of our initiatives and the opportunities to drive continued growth in sales going forward.

Now Bill will provide further details on our first quarter results and additional color on our second quarter outlook.

Thank you, Jim. Turning to our financial results, starting with the first quarter. As Jim mentioned earlier, total sales for the quarter grew 21% to $6.0 billion. Comparable store sales grew a very robust 17%, primarily driven by an increase in the number of transactions. First quarter 2026 operating margin expanded 120 basis points to 13.4% compared to last year's 12.2% and significantly exceeded our expectations.

Cost of goods sold was 145 basis points lower in the quarter. Merchandise margin improved by 85 basis points, while occupancy leveraged by 60 basis points on the strong sales results. Distribution and domestic freight costs declined by 15 and 10 basis points, respectively. Partially offsetting these benefits were buying costs that rose 25 basis points due to higher incentives given the earnings upside.

SG&A for the period rose 25 basis points due to higher incentives given the outperformance. Both marketing and store-related costs leveraged during the quarter. First quarter net income, $650 million compared to $479 million last year, and earnings per share rose 37% to $2.02 from $1.47 in the prior period.

Now to our shareholder return activity. As noted in today's release, we repurchased 1.5 million shares during the quarter, for an aggregate total cost of $319 million under the new 2-year $2.55 billion authorization approved by our Board of Directors in March of this year. We remain on track to buy back a total of $1.275 billion in stock during 2026.

Before turning to our forward outlook, I'd like to briefly address tariff refunds. Like other companies, we have submitted refund claims for tariffs. Given ongoing uncertainties related to the timing and ultimate amount of the reimbursement, we have excluded potential refunds from our forward guidance.

Now turning to our outlook for the second quarter. As Jim noted earlier, we exited spring with solid momentum. As a result, we are projecting comparable store sales for the 13 weeks ending August 1, 2026 to be up 6% to 7% and earnings per share to be in the range of $1.85 to $1.93. The operating statement assumptions that support our second quarter guidance include the following: Total sales are projected to increase 9% to 11% versus last year. The same-store sales performed in line with our forecast. Operating margin for the second quarter is expected to be in the range of 12.8% to 13.0% compared to 11.5% last year. The expected improvement reflects an increase in merchandise margin as well as lower distribution costs as we anniversary the opening of the new distribution center and tariff-related ticketing costs in the second quarter of 2025.

We plan to add 47 new stores consisting of 35 Ross and 12 dd's DISCOUNTS during the period. Net interest income is estimated to be $24 million. Our tax rate is expected to be approximately 25% and weighted average diluted shares outstanding are forecasted to be about 320 million.

Now turning to the full year. We are raising our fiscal 2026 sales and earnings guidance to reflect the exceptional first quarter results and the solid second quarter guidance. In addition, our assumptions for the second half remain unchanged. As a result, comparable store sales growth for fiscal 2026 are forecasted to increase 6% to 7% on top of a 5% gain last year. Earnings per share for the full year are now projected to be in the range of $7.50 to $7.74 up 13% to 17% when compared to $6.61 last year.

Now I will turn the call back to Jim for closing comments.

Thank you, Bill. We are very encouraged by the strong momentum to start the year. I would like to take 1 more moment and recognize the entire team across the company. We were able to grow sales in the quarter by more than $1 billion and posted the highest same-store sales growth in the company's 40-year history. .

Thank you all for all of your hard work and for the fantastic execution on our new growth initiatives. At this point, we would like to open the call and respond to any questions that you may have. John? .

[Operator Instructions] And the first question comes from the line of Matthew Boss with JPMorgan.

Great. And congrats on a really great quarter.

So Jim, I guess the question is, could you help us to bottoms-up build, whether it's the 17% comp in the first quarter, or 9% comps, if I look at trends over the past year? And maybe just relative to the consistent 4% comp that the business generated pre-pandemic. What I'm trying to get at is how durable you believe that the drivers that's putting together these kind of comps are today? And anything that you believe the business would need to give back as we think multiyear?

Sure. Great question. The company performed extremely well for years before I got here. I think if we made any changes, it's really a shift towards more focus on customer acquisition. So if you think of the health of our comp. And I don't think [ all comp ] sales growth is created equally. So the health of comp has been driven by transactions for the third consecutive quarter, and it's even more driven by transactions this quarter than even in the fourth quarter and the third quarter in terms of the transactions as a component of their overall comp.

In terms of the durability, those transactions are driven by more customers. So we're seeing a double-digit increase in customer count on a comp store basis. We are seeing very strong growth across all ethnicities, all age groups, including with the young customer, all income levels. And then if you think about the flywheel concept of bringing more customers through marketing initiatives, great in-store environment, great merchant selection, getting them in the store, converting new shoppers into buyers with just compelling assortments and tidier stores and better in-store merchandising.

And that just drives more comp store sales, it gives you more store labor, and more marketing, and we talked about this on the last call, but we're -- we just have gotten started on many of these initiatives. So I think it is durable. We probably had 2 unique cases in the first quarter. One was idiosyncratic to Ross, which was the first quarter historically has been one where we were very conservative. So we probably had a little bit more pent-up demand to go after.

And the second one was across all of retail, at least all of retail at our kind of priced tier, which is we do believe that some portion of the sort of outsized comp could be attributed to higher tax rebates versus last year. But even if you strip those 2 things out, look, we have had a very, very strong quarter, and are quite pleased. It's a really great team effort with every function in the business contributing.

Great. Great color. Jim, you cited exiting the quarter with continued momentum, and I know you don't lay out 6% to 7% forecast slightly. Have you seen any change in customer behavior so far in the second quarter? Or just any change in trends maybe if we're thinking about by category?

Matt, I wouldn't comment on the second quarter, but maybe it'd be helpful if I talked about the trends during the first quarter. The quarter started particularly strong in February. Jim talked about this a little bit, but we transitioned very well from holiday to spring selling, the place where we've struggled for a number of years. We've always been very, very conservative to start the year.

And the merchant and planning team did a fabulous job of planning and executing against that transition. We continue to see mid-teen comp for the balance of the quarter. Some of that was likely aided somewhat by the tax refunds. Jim also mentioned that. And then the Easter calendar shift did move some demand. And again, that's demand versus last year earlier in the quarter. So all in, we started very strong and had good momentum throughout the quarter. .

And the next question comes from the line of Lorraine Hutchinson with Bank of America.

The 17% was an unprecedented comp and probably was a result of unprecedented amounts of chase inventory. So can you just talk about how comfortable you are with your inventory reserve levels and quality and ability to continue to chase into this 6% to 7% comp?

Sure. I think we're very comfortable. The availability of closeouts in the marketplace is still outstanding. I think you'll hear that from each of the players in the industry. I think our buyers and our merchants have been very aggressive. The whole -- we did really have to react to a pretty sharp spike in sales and we're able to feed demand.

The other great thing is I think the market is now recognizing that our growth rate is a bit outsized. And we're getting a lot of first calls now. And again, hats off to both of our Chief Merchant, Karen and Karen and their teams for really hustling to make sure we had product available and seasonally appropriate product to transition us from holiday to spring through Easter and the Mother's Day. It's just been a fantastic execution. But I would not be worried about availability of product.

The next question comes from the line of Paul Lejuez with Citigroup.

It's Tracy Kogan filling in for Paul. I just you guys said domestic freight leverage this quarter. And I was wondering what the driver was there and what you're building in for the year? And then I think ocean is a smaller piece for you, but wondering if you could give some color on what you're seeing on that piece of freight as well? And then I have 1 follow-up. .

As you mentioned, freight costs did lever 10 bps year-over-year, but higher expected fuel prices did limit some of that leverage that we typically get from that sales outperformance. Then going forward, we're kind of finalizing freight contracts as we speak, and our guidance does reflect the assumption that we'll have elevated fuel prices that will pressure freight costs, both ocean and domestic in the second quarter and the full year.

And you guys mentioned traffic being the driver this quarter. I was hoping you could talk about some of the other metrics like average basket AUR, unit conversion...

Sure, Tracy. So as we said, the primary driver was traffic. The average basket also grew by a significant lower proportion of the sales growth and the units sold were flat.

You said flat?

Units per transaction is flat.

They Were flat. I'm sorry, I was just clarifying.

Flat. Yes, units per transactions were flat.

And the next question comes from the line of Corey Tarlowe with Jefferies.

Great. I guess, Jim, as you think about how broad-based this really strong comp has been. Can you talk about if you saw any inflections by category, whether it's ladies, home, footwear or even juniors perhaps within ladies. And is there anything specific you think that's driving that mix shift? Because there's very clearly been quite a strong acceleration in trends quarter-over-quarter.

Yes. Thank you. The strength was broad-based and the sequential improvement was pretty broad-based also. Some of the categories that tend to get more focused, the -- ladies business had a very nice sequential improvement from the first quarter and actually outperformed the balance of the businesses. We call it out cosmetics, also a nice sequential improvement and outperformed.

But within Ladies, lots of strength there, the Juniors business was very strong. Just as we look down the categories, in an effort to try to give a little bit more transparency and a little bit more color than I think it's typical, we wanted to comment that every category was positive in the teens or higher. So we were obviously very, very pleased with the performance across the board. And every buying office should be just thrilled with what they were able to achieve.

Makes sense. And that's also very helpful. I have a follow-up for Bill. Just as we think about the flow-through on comp versus plan. Can you just remind us how to think about that and maybe what you saw in the quarter.

For the quarter, the earnings flow-through on the robust sales was about -- was actually above our expectations, but right in line with the model. So that felt pretty good. And then going forward, from our guidance perspective, and as we talked about, we beat Q1 by about $0.35, and are flowing about $0.38 for the full year based on the higher Q2 guide. So we feel like we're right in line where we should be.

On the flow-through, so we typically say every point of comp is worth about 10 to 15 basis points. We were within that range -- at the high end of the range in the first quarter. Some movement between categories. We were slightly better on merchandise margin and a normal flow through, but we did spend more store payroll to support the increased product flow.

And the next question comes from the line of Michael Binetti with Evercore ISI.

Let me think about that the last answer there. We delevered SG&A on a 17% comp. It sounds like there was some potential investment and incentive comp, certainly incentivized employees can help grow top line. So it seems like a good investment. But does SG&A leverage on the 6% or 7% comp in the second quarter, is it 2% to 3% comps that's baked in the back half? Or if we come in above that, do we start looking for other pockets to invest in to support the top line?

Michael, maybe I'll give some more color on the first quarter. As you said and as we said in the commentary, we delivered by 25 basis points. That was all due to higher incentives without the incentives, both marketing and store-related costs leveraged during the quarter. We had in our guidance plan selling costs up slightly and that was due to wage growth and with some investments and improvements in the store experience to drive top line growth.

So with the strong comp that we believe was somewhat helped by those investments, we got leverage there.

And then on the go forward, right, from a guidance perspective, the largest driver, right, is going to be merch margin, and we would expect to see some benefit in DC cost as we anniversary the opening of our Arizona distribution center. But we do again anticipate merch margins to remain a benefit in Q3 and Q4.

Okay. And then if I could follow that, on new stores, you gave us kind of a higher new store productivity assumption last year -- last quarter, Michael, as far as modeling out relative to the 65% you gave us historically. But you're delivering numbers well above that new guidance, I think it was 75%. I think it's something to the [ 9 handle ] this quarter. Can you just give us a little idea of the financial bridge into what looks to be a pretty different new store opening profile.

Sure. As we said, we have 110 openings and we are in, I'd say, possibly the best shape we've been in, in terms of getting leases done. So this year looks very, very good. And then our pipeline into next year also looks very good to maintain that 5% unit growth. You asked about new store productivity. Last year, our new store productivity was above that level. So there's a number of stores that haven't comped yet, those stores continue to do very, very well. We gave you guidance for 70% to 75% of a mature store for the new stores this year. I'd say it's very early, but we hope to beat that number.

And the next question comes from the line of Chuck Grom with Gordon Haskett.

Just a follow-up on Michael's question, just [ NSP ] really strong. How are you thinking about units going forward? Do you still want to target the 5%? Do you think about densifying in the Northeast more? Just a little bit of thought on unit growth maybe over the next several years given how strong you're opening up stores right now? .

Yes. I think our -- what we're modeling internally is the 5% unit growth over the longer term. If we happen to get a big deal through bankruptcy or get ahead of that store opening. I don't think we'd hesitate to increase that target.

Okay. And anything geographically you think about differently? .

Well, the Northeast has certainly opened. We -- that's certainly built into our 5-year plan in New York. We have a [indiscernible] obviously, we'll go further into the Northeast, but we exited '25 with 12 stores in the New York area and have 2 locations in the first quarter and those stores are doing very well for us.

Got you. Great. And then as you think about the second half, right, in the tougher comparator indiscernible] how do you think about the drivers to help you comp the comp. The implicit comp is a 2% to 3%. What gives you the confidence there in terms of the marketing in-store changes, the product assortment? I guess how would you force rank what gives you the confidence to lap that positively? .

I would circle back to some of my earlier comments on this call and on the prior call. There are 2 schools of thought. One is you're up against strong comps and how you're possibly going to get -- put numbers on top of that. But the second is you're in the early stages of transforming our company, you're starting to build momentum. The comp is driven by more customers that customer count increase continues to get stronger with each quarter.

And we also have a lot of merchandising initiatives, right? We -- the merchants are constantly opening up new brands. We found confidence now to introduce brands that are more in the better and best price points and add those to the great stable of brands that we already have, so that may give us some more comp increase. The stores have proven that they can contribute to the store growth, but they are in the very early stages of changing visual merchandising and store labor models and shifting hours, reallocating store labor hours to sales-driving activities. And Aaron and that team have just done incredible work. But we're still learning, right? We're in the very, very early stages of many of these initiatives.

I hear you that people will constantly wonder if you can comp a 7% or 9% or 17%. Given the momentum that we're seeing and given the underlying KPIs in the growth, I mean customer count across geographies, the strengths in the transactions at the risk of laying up new second half guidance right now, I think we have plenty of more opportunity for continuing very solid comps, maybe not a 17%, but very solid comps in the balance of the year.

And the next question comes from the line of Brooke roach with Goldman Sachs.

Jim, I was hoping you could reflect on what's working very well in marketing today and what we should expect might change as we look into the back half of the year as you annualize some of these initiatives?

Sure. I think you'll see more of what we have been doing. We're really trying to modernize the creative message we're mixing up our media mix. We're doing more events. All of those things are adding to the proverbial top of funnel. We've got some pretty exciting things upcoming. It's in a competitive industry like off price, sometimes it's hard to give more color because you then see it end up at one of your competitors and what they're doing. .

But suffice it to say, I think that we're in the very, very early stages of focusing on the Ross and dd's brands, contemporizing them and having them get their own sort of followership. And you can see it, right? You can follow us on social media, you can see our television spots. And it's -- I think it's a very refreshed view of how to go to market in retailing and certainly in off-price retailing. So stay tuned, there's a lot more coming over the next few months from a marketing standpoint.

Great. And then just a quick follow-up. I was hoping you could put a finer point on your expectations for fuel surcharges for the year. Can you quantify the headwind that you're expecting in the back half? And what oil price is embedded within the guidance?

We try and estimate based on what the DOE and others estimate. And so like we said, we do expect some pressure in the second half. But again, if fuel prices differ materially from where they are now, then we see some additional pressure. So that's something we're monitoring closely and trying to get the best estimates that we can.

And the next question comes from the line of Mark Altschwager with Baird.

seems a little silly to ask about consumer headwinds when you reported a 17% comp and you're guiding 6%, 7%. But just wondering if you're seeing any indications of shifts in consumer behavior as the inflationary pressures have ticked up. You had strength broad-based across regions, but any color on California, specifically where gas prices are even higher.

On your first question on both customer count and comp growth. We did not see a variation across income levels. Actually, all income levels were very strong. California performed in line with the chain during the quarter. I would say on fuel costs generally, historically, it's been hard for us to see any immediate direct correlation between fuel prices and our sales performance. That said, obviously, the potential impact can vary based on the magnitude and how long increased fuel prices last. I would also add the silver lining for off prices that any uncertainty in the macro environment could lead to customers taking more value with shopping and create closeout opportunities for us from the supply side.

And a follow-up for Jim. If you could give us an update on the branded apparel rollout. How broad is the strategy down ladies at this point? And with the acceleration you're seeing in new customer acquisition and overall growth, how are you thinking about that balance between the good, better, best and what's resonating most with that newer customer you're bringing in.

So the brand strategy in ladies and across the entire business is now very much in place and has been I think we've lapped it a few quarters ago. It was a great adjustment to kind of correct the time when perhaps the business, certainly before I got here had evolved away from some of the really compelling brands and the company was able to correct that also before I got here. So there's a lot of people that are working really hard to put that in place.

And we can see it in the strength and now the pervasive strength in the ladies business mostly, but perhaps it's also a part of the strategy across the board. In terms of good, better, best, we're hyper focused on that right now because you're right to call out the potential softness and pressure in consumer. And it's all over the news. It's what other retailers are calling out, et cetera. So we have to ensure that we're in stock with sort of the best bargains across price points, but certainly the good price points.

But then when we look at our data, our customer KPIs are unbelievably strong, right? More customers shopping more frequently and spending more on each trip. So we're -- now we're trying to find if there's some more opportunities to stretch our prices, not on same goods, but on new brands and new goods and really just deliver even a broader assortment for our customer out there. So we're just -- we're really thrilled with sort of the health of the business and we're very cognizant of what's happening in the macro environment. We want to deliver the absolute best bargains and best values for customers, particularly those under pressure from the price of oil or gas prices, et cetera. But we also have this sort of growing customer base that seems to be responding across good, better and best. .

The next question comes from Dana Telsey with the Telsey Advisory Group.

Congratulations on the very nice results. Given the new customer acquisition that seems to have accelerated and the flywheel of marketing driving new customers, as you think about the sales gains that you had, the new customer acquisition, any different demographic profile younger, maybe wealthier with the trade down? Anything you're seeing there? And then how do you think of the cadence of marketing spend as you go through the balance of the year, is 1 quarter more allocated than another? .

And then just lastly, on the New York stores, the 12 that you mentioned, how much higher are they then your plan? What are you seeing that's new or different? And how do you think of Northeast openings as a percentage of the total mix going forward.

All right, Dana, thanks for the questions. I'll get started. I think Michael will take the stores question. In terms of my customer group, it's one of those report cards that you just -- you almost can't believe but we've had customer growth across every ethnicity, every age group and every income level.

I think the part that -- and we can -- we're using the sort of third-party available credit card data, I think the 2 things that would make our customer count unique relative to the rest of retail right now is certainly the magnitude, I think the number of customers that we're capturing and the year-over-year increase based on what we can see for us and for other players, is higher. And then notably, the younger customer that sort of very difficult to attract 18- to 24-year-old customer. We're just outperforming virtually every other retailer that we can track. So those 2 pieces, if you're looking for nuances, that younger customer has really gravitated towards us, which is -- has been part of the strategy and is really starting to take root.

In terms of the cadence of the spend firstly, look, we're at a rate of sales, where we didn't spend any more in the first quarter than we did last year. In fact, we've got a little bit of leverage there. We continuously get questions as well, should we be investing more? And maybe over time, we will. But right now, we're certainly driving healthy traffic with the marketing spend that we have. As we look at it by quarter, there might be some small investments here or there in the balance of the year. Nothing that will move the needle in a material way. And clearly, we spent more money in holiday quarter in absolute dollars but not necessarily as a rate. So that's sort of our view right now from a marketing standpoint. And then from a stores perspective, Michael will take that .

Dana, obviously, we're very excited about further expansion into the Northeast. I don't want to forget about our existing markets right now, our new store growth, only about 20% of our new store growth is in the newer markets. What I can tell you about the New York stores, as you know, not every store is creative equal, but I can give you a benchmark versus our underwriting pro forma, and we've far exceeded our expectations of what we thought or needed from an underwriting standpoint.

So we're very excited about the expansion. We see we can be very successful. Obviously, the population density in the Northeast is very similar, actually more population density than even our oldest market of California. So we'll the Northeast real estate department has done a nice job of beginning to write leases there, and we'll have more to say as we expand our rollout.

And the next question comes from the line of Simeon Siegel with Guggenheim.

Really nice job. I'm going to try and sneak 3 quick ones and if I can. What percent of the growth in transactions at this point are coming from new customer acquisition versus that greater frequency of existing that you mentioned, Jim. And then how are you thinking about the timing of CapEx this year? I think Q1 was somewhat similar to last year, but you do have the lift guided for the full year? And then just taking a quick step back, just any help on long-term EBIT margin opportunity, recognizing that kind of the ongoing strength we're hearing from you. Maybe even how are you thinking about benchmarking that or analyzing that opportunity.

That was impressive -- very, very quick in getting all through those questions. I'll take the first one, and then Michael or Bill take the others. Parsing out the components of the comps to finally, I would say, and we're on record already saying transactions was the primary driver of the comp. And of the transactions, new customers was the primary driver of that.

On the CapEx side, we typically don't get into parsing it out by quarter. It's not skewed particularly at all, we are slightly up this year, but I don't think it's very divergent by quarter.

In total, we're still estimating about $1.1 billion in capital versus $810 million -- $819 million last year. I think your last question is on the long-term operating margin. Our model hasn't changed at this point. We've set double-digit EPS growth, about 5% unit growth at 60% to 70% productivity drives 3% to 4% EPS growth, long-term gains at 3% to 4% on comp and I'll come back to that in a second and 2%, 3% from share repurchase program. If we can comp higher than the 3% to 4%, we'd expect outsized EBIT growth. .

And the next question comes from the line of Krisztina Katai with Deutsche Bank.

great quarter. Congrats on. So I wanted to ask on cosmetics. Obviously, it was a standout in the quarter. Is that primarily branded availability? Is it consumer trade into prestige just getting the trend right or increased space allocation? And how durable is that?

Well, I think it's several things. I think one, the team, Michael Kay and Stephanie have just done an unbelievable job of driving that business. And that's been a standout for -- from a category perspective for several quarters now. Secondly, they've done a really nice job of bringing in new brands. You can see them in the store, but there's some new high kind of exploding brands that are now selling to us, which have been fantastic.

And then thirdly, there is a little bit of just an underlying consumer trend their. Korean beauty products is one of them, and they've really done a great job there on top of that. So in terms of space allocation, we haven't really changed the space allocation orders for cosmetics in any meaningful way. So I think they've -- their sales productivity on a per square foot basid has just gone up quite nicely.

Great. And if I can just ask.

Sorry. And if I can just ask a follow-up, just very quickly, like you mentioned gaining priority access to deals. Can you talk about how that is showing up in buying cost, IMU, speed to floor conversion rates? And then just considering your strong top line, can the advantage expand further?

Sure, sure. I think the sentiment in the market -- and look, we're 1 of 3 big competitors out there. The relationships that the merchants have with the off-price market is critical and the relationships that the Ross merchandising team has is just remarkable. Marvel as a new entry into this world of how relationship as it is.

Having said that, I think the market is starting to see the transformation of Ross going from a very good company and accelerating from there. And it's getting noticed. And I think now when someone has a good deal or more closeouts, we're getting calls. And it's partly because we can take the goods. We have seen some cancellations in the market, some from main store retail and some from other off-pricers that we are able to pick up.

So I think the last thing I would say is I think our merchants not only great relationships, but tend to be very easy to work with the market and that's a philosophy that I inherited from my predecessor, and we absolutely want to continue to do that. We want to be partner like and low friction -- but we've seen -- we've opened up new vendors, and we've seen a lot of sort of early calls on opportunistic goods.

And the next question comes from Aneesha Sherman with Bernstein.

Congrats on the quarter. I have 2, please. Jim, you mentioned the word transformation earlier on in your comments. I wanted to ask, over the last year, the company has pursued a lot of new initiatives in marketing, assortments, stores, et cetera. Do you think there's been a cultural shift in how decisions are being made that is driving this broader set of ideas and initiatives across the company? And then I have a follow-up as well.

Look, I inherited a well-run company with a great culture. I think if there's been any sort of shift in how we operate. It was a little bit of harkening back to the earlier days in Ross when it was very entrepreneurial, and we sort of challenged ourselves to spark more growth, empower people to make quick decisions, be entrepreneurial, balance our pretty heavy focus on risk aversion with a little bit more of a growth orientation. And I think internally, the team has been very welcoming of that.

So yes, I would say, if you think about continuum between playing defense and offense, we've shifted the whole company in the culture a little bit more towards offense, but still always being prudent and not taking undue risk. But again, I just want to say one more time. I was very lucky to be able to inherit a company that was already very well run and already successful. And we've just been able to layer on some initiatives to augment that growth.

And then a follow-up on an earlier comment on double-digit growth in customer accounts. Can you give us some color on what that looked like the last 2 quarters, the last couple of quarters, Q3 and Q4. I want to get a sense of how that run rate increased just to help us think through the back half of the year and the comp year-over-year growth in the back half? .

So it's been building. We definitely didn't get a double-digit growth in customers and then comp lower than double digits fortunately. But it has -- if you were to think of it, we think of retail same-store sales, you would say we've had sequential improvement in customer count growth on a comp store basis in each of the last few quarters.

The next question comes from the line of Marni Shapiro with Retail Tracker.

Congratulations. And Jim, I love how you sound so pleasantly surprised that the market loves the Ross buyers. that's always been the case. I knew them a long, long time ago and everyone loved them. So congratulations on that. Could you -- you've talked about updating and renovating some of the stores. Some of it was just a light touch, if you can just modernizing them, if you can give an update on how that's going? And are those stores outperforming? And then could you just also give us an update? I'm assuming this is true that you'll continue with your buyback through the rest of the year?

Marni, it's Michael. As you said, we've been working on refreshing all stores in the chain. And again, it was to try to give a more modern look and feel for our customer. And the refresh was mainly new perimeter signing and wave finding signage along with addressing cosmetic repairs. We got through about half of the chain last year. We decided to pause for 2 reasons.

First, we wanted to be able to measure the sales impact. And we did see a sales impact in those stores. We saw improvement in customer surveys on the shopping experience. We decided this year to pause as we're looking to see what kind of things we want to do to the store. And when I say that, it doesn't mean we're going to go back and refresh every single store of the chain, come up with a new performa and have a big capital outlay. But we wanted to pause and see if there's other changes we want to make in the next half of the stores. And then also look at new store prototypes, if there's anything we want to change from look and feel or how we're merchandising the stores. So that's where we are at this point.

And then regarding the buyback, no change there. We remain on track to buy a total of $1.275 billion in stock during '26 so that's unchanged.

And the next question comes from the line of Dylan Carden with William Blair.

I'm curious, Jim, to the questions on -- or in and around new customers. Do you feel that between access to brands, some of the new marketing you're doing that you're kind of meaningfully structurally expanding your market? Or is it just sort of recapturing share within your existing market, either going up or down market, you mentioned kind of younger customers. More meaningful change going forward.

It's a very insightful question. At the risk of tipping our hand too much, that's absolutely part of the strategy. It's -- we have a bull's eye of a core customer, and we have to ensure that we're constantly focused on that customer that has sort of built this business, but how do we -- in [indiscernible] circles around that core, how do we add new customer segments. So -- that's part of the strategy. It's very early in our evolution in doing that. But the early read is that we've been able to introduce the Ross brand into different pockets of consumer shoppers. And it's -- again, it's a very insightful strategic question, Dylan, I appreciate it. And I think you're on the right track there.

Ladies and gentlemen, there are no further questions at this time. I would like to turn the call back over to Jim Conroy for any closing comments.

Well, thank you, everyone, for joining us today, and we look forward to speaking with you on our next earnings call. Take care.

And ladies and gentlemen, thank you for your participation. That does conclude today's teleconference. Please disconnect your lines, and have a wonderful day.

Good afternoon, and welcome to the Ross Stores Fourth Quarter and Fiscal 2025 Earnings Release Conference Call.

[Operator Instructions]

Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call will contain forward-looking statements regarding expectations about future growth and financial results, including sales and earnings forecasts, new store openings and other matters that are based on the company's current forecast of aspects of its future business. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from historical performance or current expectations. Risk factors are included in today's press release and the company's fiscal 2024 Form 10-K and fiscal 2025 Form 10-Qs and 8-Ks on file with the SEC. And now I'd like to turn the call over to Jim Conroy, Chief Executive Officer.

Thank you, John, and good afternoon, everyone. Joining me on our call today are Michael Hartshorn, Group President and Chief Operating Officer; Bill Sheehan, Executive Vice President and Chief Financial Officer, and Connie Kao, Senior Vice President, Investor Relations.

Before I review our performance for the quarter and the year, I wanted to acknowledge all of the associates throughout the Ross organization. The results we achieved in 2025 are a direct reflection of your dedication and hard work throughout the year. The strong collaboration across the company in all functional areas was essential to our success. I want to thank all of you for your great work.

Now turning to our quarterly results. As noted in today's press release, we are pleased to report that our business momentum accelerated further in the fourth quarter, with both sales and earnings significantly surpassing our expectations. Throughout the holiday season, we delivered compelling merchandise assortments to our stores, benefited from higher customer engagement through our new marketing campaigns and executed in-store initiatives that enhance the customer experience. These efforts, combined with healthy growth in new stores contributed to a 12% growth in total sales for the quarter.

Turning to comparable store sales growth. We delivered a robust 9% increase despite a 1 percentage point erosion in comps from weather, primarily the January storms that impacted many parts of the country. We were quite pleased with the health of the comp growth as it was driven mainly by an increase in transactions and customers with a modest increase in basket. We saw broad-based strength across both departments and geographies. Every major merchandise category showed solid positive sales growth with shoes and cosmetics performing the best. Similarly, every region of the country was positive, with the Midwest and Mountain regions the strongest. dd's DISCOUNTS also posted healthy sales gains as the chain value and passion offerings continue to resonate with shoppers. Similar to Ross, the growth was broad-based across both merchandise categories and regions.

Moving to inventory. Consolidated inventories were up 8% and and Packaway represented 37% of total inventory compared with 41% last year. We are pleased with our inventory position at year-end. Regarding our store expansion program, 2025 is an exciting year of continued growth as we expanded into new markets while deepening our footprint in existing ones. During the year, we added 80 new Ross Dress for Less stores and 10 dd's DISCOUNTS stores. Importantly, we expanded into several new markets for Ross, including our first stores in the New York Metro area and Puerto Rico. Inclusive of 9 closures, we ended the year with 2,267 stores, consisting of 1,904 Ross Dress for Less and 363 dd's DISCOUNTS locations.

Before I turn the call over to Bill, I'd like to briefly review initiatives underway that position us well for incremental sales and profit growth as we enter 2026. First, with merchandising. We are pleased with the strength of our assortments across the store, where we have delivered more brands at the right value for our customers. Our buying organization has done an incredible job navigating through tariffs and strengthening our vendor relationships to deliver merchandise that is resonating with our customers. It is encouraging to see the strength in the Ladies business as well as the solid growth and continued sequential improvement with our home category, which faced heavy pressure from tariffs throughout the year.

Looking forward, we are pleased with our inventory levels and are seeing ample availability in the marketplace to support our business trend going forward. On the marketing front, we are pleased with our holiday campaign as we continue to refine our brand messaging and believe it is connecting with today's shopper. We are encouraged by the higher levels of customer awareness and engagement we are seeing. We are also quite pleased with the increase in customer traffic and believe that this positions us well for continued growth as we look ahead. In our stores, we have made meaningful merchandising and operational improvements which we believe also contributed to the outsized sales growth. The stores team did a great job of managing the holiday surge in the business.

Additionally, the supply chain organization executed extremely well during the peak season, which enabled us to drive exceptional sales growth through fresh receipts and fast turning inventory. Overall, we are encouraged by the positive impact these initiatives have had on our recent performance, and we see opportunities to build on these learnings to support our growth plans in 2026 and beyond. As we enter the new year, we are seeing a very strong start to the first quarter, which gives us confidence that our focus on improving our connection with the customer is taking hold.

Turning to store expansion. Many of the changes we implemented that helped drive comp store sales growth also had a positive impact on new store productivity, which further bolsters our confidence in accelerating our store opening plans going forward. As a result, we are planning to open 110 new locations this year, which represents 5% growth. Part of that growth reflects the reacceleration of dd's DISCOUNTS with plans to open 25 stores in 2026. For Ross, we see an opportunity to open 85 new stores this year, slightly above last year. As we continue to identify attractive real estate opportunities across our markets, we remain confident in the long-term potential to grow Ross and dd's chains to 2,900 and 700 stores, respectively and expand our reach to even more customers over time.

Now Bill will provide further details on our fourth quarter and fiscal year results and additional color on our outlook for fiscal 2026.

Thank you, Jim. Turning to our financial results. Starting with the fourth quarter. Total sales for the quarter grew 12% to $6.6 billion. Comparable store sales grew a robust 9% primarily driven by an increase in the number of transactions. Fourth quarter 2025 operating margin was 12.3% compared to last year's 12.4%, which included a 105 basis point benefit from the sale of a packaway facility. Excluding the benefit last year, operating margin increased 95 basis points. Cost of goods sold was 65 basis points lower in the quarter. Occupancy leverage leveraged by 30 basis points on strong sales results, while distribution and domestic freight costs declined by 20 and 15 basis points, respectively.

Merchandise margin improved by 10 basis points. Partially offsetting these benefits were buying costs that rose by 10 basis points mainly due to higher incentives given the earnings outperformance. SG&A for the period rose 75 basis points, primarily due to last year's packaway facility sale.

Excluding the sale, SG&A was 30 basis points lower. Fourth quarter net income was $646 million, and earnings per share for the fourth quarter was $2. This compares to net income of $587 million and $1.79 in earnings per share in the prior year, which included the previously mentioned benefit of approximately $0.14 per share related to the sale of a packaway facility. Excluding the benefit, earnings per share for the quarter grew 21%.

Now turning to results for the full year. Total sales for the year increased 8% to a record $22.8 billion, up from $21.1 billion last year. Comparable store sales grew 5% on top of a solid 3% gain in fiscal 2024. Net income for fiscal 2025 was $2.1 billion, similar to last year. Earnings per share were $6.61, up from $6.32 in the prior year. Excluding the previously mentioned $0.14 gain from the facility sale last year and the approximate $0.16 per share impact from tariff-related costs this year, earnings per share grew 10%.

Now to our shareholder return activity. As noted in today's release, we repurchased 1.5 million shares during the quarter, completing the 2-year $2.1 billion program announced in March 2024, in line with our plans. Our Board of Directors recently approved a new 2-year $2.55 billion stock repurchase authorization or approximately $1.275 billion each year for fiscal year 2026 and 2027. This new plan represents a 21% increase over the recently completed repurchase program.

In addition, the Board also approved a 10% increase in our quarterly cash dividend to $0.445 per share. The increase to our stock repurchase and dividend programs reflect our continued commitment to return excess cash to our shareholders after funding growth and other capital needs of our business.

Now let's discuss our outlook for fiscal 2026, starting with the first quarter. As Jim noted earlier, we ended the quarter with solid momentum. And while early, we are encouraged by the continued strength in the business as the spring season begins. As a result, we are projecting comparable store sales for the 13 weeks ending May 2, 2026, to be up 7% to 8% and earnings per share of $1.60 to $1.67. The operating statement assumptions that support our first quarter guidance include total sales are projected to increase 10% to 12% versus last year.

If same-store sales performed in line with our forecast, operating margin for the first quarter is expected to be in the range of 11.8% to 12.1% compared to 12.2% last year. The expected decrease reflects higher DC costs from the opening of a new distribution center in the second quarter of last year and unfavorable timing of packaway-related expenses. In addition, we project higher incentive costs versus 2025 when we underperformed our plan.

Partially offsetting these higher costs is our expectation of an increase in merchandise margin. We plan to add 17 new stores, consisting of 13 Ross and 4 dd's DISCOUNTS during the period. Net interest income is estimated to be $27 million. Our tax rate is expected to be approximately 23% to 24%, and weighted average diluted shares outstanding are forecasted to be about $322 million.

Turning to our full year guidance assumptions for 2026. For the 52 weeks ended January 30, 2027, we are forecasting same-store sales to be up 3% to 4%, and earnings per share to be $7.02 to $7.36 compared to $6.61 for fiscal 2025. Total sales are projected to be up 5% to 7% for the year. If same-store sales performed in line with our forecast, operating margin for the full year is expected to be in the range of 12% to 12.3% compared to 11.9% in 2025. This plan reflects higher merchandise margin and lower distribution costs for the year.

As Jim mentioned earlier, we expect to grow our store base by 5%, reflecting approximately 110 new locations comprised of about 85 Ross and 25 dd's DISCOUNTS. These openings do not include our plans to close or relocate about 10 to 15 older stores. Net interest income is estimated to be $92 million. Depreciation and amortization expense inclusive of stock-based amortization is forecasted to be about $740 million for the year. The tax rate is projected to be about 24% to 25% and weighted average diluted shares outstanding are expected to be about $319 million. In addition, capital expenditures for 2026 are projected to be approximately $1.1 billion. There are several key investments included in our 2026 plans. First, as previously mentioned, we are reaccelerating our store opening plans. At dd's, we are opening 25 stores this year compared to 10 last year. In addition, we plan to open 85 new Ross stores this year compared to 80 last year. Next, we plan to make further investments in our supply chain, including the continued buildout of our next distribution center as well as the initial outlay for another DC. Lastly, we are investing in our existing store base to drive an improved customer experience. Now I will turn the call back to Jim for closing comments.

Thank you, Bill. As I reflect on my first year as CEO, I'm extremely grateful for the support and dedication of the entire team. The year had its early challenges with tariffs and uncertainty in the macro environment, where we remain resilient and focused on executing our strategies. Looking ahead, we are optimistic about the strength of our business and the initiatives planned for 2026. At this point, we would like to open the call and respond to any questions that you might have. John?

[Operator Instructions]

And the first question comes from the line of Matthew Boss with JPMorgan.

Congrats on a great quarter. So Jim, could you elaborate on the inflection to 8% traffic led comps in the back half of the year? Or I guess, how would you bridge the more than 600 basis points of comp improvement relative to low single digits over the last 4 quarters? And on the 7% to 8% comp guide, you know I had to ask you on this. I mean this comes from a conservative company and a conservative guy historically. Could you elaborate on the further improvement you saw to start the quarter, maybe confirm the moderation that you're embedding for the remainder of the quarter. And did you embed any potential lift from tax refunds or stimulus during the quarter?

Sure. Happy to answer both of those questions. In terms of the inflection point, it was really broad-based across essentially all merchandise categories, all regions of the country. You were talking about the sequential improvement from sort of the first half to the second half of the business -- of the year. And if we look at the second half in total, there's a lot of great things that are coming together. We've had a lot of conversation on past calls about the Ladies business. We mentioned on Q3 that the Ladies business had return to strength -- was slightly stronger than the company. And then on the fourth quarter, the Ladies business continued to be very strong, more in line with the overall business. Men's continues to be strong. We've seen probably the most sequential improvement in the quadrant of the store that we would call center core. So we called out cosmetics and shoes specifically. Those were 2 very nicely growing businesses for us in both Q3 and Q4 and really nice sequential improvement throughout the year.

And then finally, not to leave [indiscernible] in the home business and the home team out, the home business in the beginning of the year was kind of difficult for us, and it was a business that was most under attack with tariffs, but they have done a really nice job of turning around that business across the board within home. On our last call, we spoke specifically about toys being important and we finished up the holiday quarter with very strong business in toys.

In terms of the comp guide, I would turn to Bill or to Michael, I would preface it with -- we, of course, are excited about a 7% to 8% comp guide, but we haven't changed the conservative nature of our guide. So it's not like we're putting out some high-flying number to get headlines, we still feel pretty good about it. I don't know if you -- either if you would like to add to that.

No. Matt, I would say, one, it is a reflection of the initiatives we have in place and the momentum we have coming out of the fourth quarter, the merchants did a tremendous job transitioning into the first quarter that we can see in the business. We're in the inverse position we were last year where we started off very, very weak. So we feel good about how we started the year. You had a question on tax refunds. We haven't built anything in for the tax refunds. It's still early. Obviously, in the tax refund season, the significant refunds just began to flow last week. And from what we can see from the treasury, they're up about 7% thus far. But with roughly 2/3 of the refunds left to come, we'll have to wait and see the impact over the entire quarter.

Great. And then just one follow-up, Jim, on new stores, productivity that you're seeing in the Northeast, how does that inform your opportunity to expand the unit growth opportunity over time?

Matt, it's Michael again. We wouldn't get into the specifics of the Northeast other than it's been very strong and it gives us a lot of confidence that we can grow there. I would say, but not only in the Northeast and you can see it in the difference between comp and total sales growth. We had one of our best years in a while in terms of new store productivity, which also gives us confidence that we can grow in our existing markets.

And the next question comes from the line of Paul Lejuez with Citigroup.

It's Tracy Kogan filling in for Paul. I had 2 questions. The first is on your merchandise margin improvement in 4Q, how much of it was driven by by better IMU from buying better versus how much was driven by lower markdowns? And what are you expecting in F '26? And then I have a follow-up.

No. For the merchandise margin, that 10 basis points improvement, I think we feel good about it. It was driven mostly by better buying and our merchants just making good decisions as they always do, around how to deliver value at the same time, following some benefit through to us.

And on '26, it's -- again, it's mainly driven by the better volume. To some extent, we get some benefit from recapturing some of the tariff pressure early in the year.

Great. And then on the flow through in 1Q, I know you mentioned higher incentive comp and timing of packaway. Can you size either of those headwinds and which one is bigger.

Could you repeat the question for me one more time?

Yes, sure. I think on the 7 to 8 comp, we would have expected maybe more flow through to the EPS line. And I think you mentioned that you had a higher incentive comp in there as well as timing of packaway. And I was just wondering if you could frame how big either of those are in terms of basis points of pressure for the quarter.

Tracy, it's Michael. As you can see on the full year guidance at a 3 to 4 comp, we leveraged EBIT by 10 to 30. So that actually above what our normal kind of long-range algorithm, always timing quarter-to-quarter. In the first quarter, we have a couple of things driving the deleverage, the first of which is we haven't yet lapped the distribution center opening from last year. So we'll begin to lap that in the second quarter, but that has a bigger impact in the first quarter. Number two, we have built into our forecast at how it plays out some pressure on the packaway impact the packaway expense. And then finally, we had a pretty disappointing first quarter for us last year, which means the incentive comp base will be lower from last year, but pressure this year. Among those, they're pretty evenly split.

And the next question comes from the line of Lorraine Hutchinson with Bank of America.

What are the key factors driving the acceleration in the ladies business? And what's your outlook for the category as we move through the year?

The acceleration in the Ladies business is rooted back with the brand strategy the company had put that in place maybe 2 years ago now, and that team has really done a great job of resetting that vendor base and the assortment there, finding a really nice balance of bringing in branded bargains across good, better and best. We've seen some nice strength in the juniors business specifically. So that's been a part of the growth there. In terms of the outlook going forward, right now, a lot of things are performing quite well. And I would imagine we're going to see continued strength in that business going forward, certainly in the first half of 2026. Did I get all of your questions there, Lorraine?

It seems like you brought more inventory into the stores during the holiday season. Is this a change in strategy? And would you expect to move more from the distribution centers into the stores as you did for the 4Q?

Lorraine, on inventory, we did mention in our remarks that inventory grew 8%. Obviously, that's 1 point in the quarter, but that's slower than our overall sales growth. We did see opportunities to increase our inventory position in front of the customer. And we believe that supported our growth and ability to chase cells in Q4 while also better transitioning into Q1, all of that while maintaining solid margins and inventory turns.

So I think we do have more opportunity, but we feel good about the levels coming into the first quarter.

The next question comes from the line of Chuck Grom with Gordon Haskett.

Jim, you talked a lot about the changes made in marketing and social media campaigns have been highly successful. I guess I'm curious how you continue to evolve the marketing strategy in '26? And do you expect marketing expenses as a percentage of sales to start to move higher over the next couple of years? Or do they stay consistent?

Great question. We're really pleased with the marketing team, the new campaigns and the agency that was put in place at the beginning of 2025. Their work started to hit the market, so to speak, for back-to-school. So I would say we're really pleased with amongst a number of other factors the change in marketing was one of the things that helped the business have an inflection point positive. So the change in marketing, some in-store changes, of course, the assortments being really great. You put all that together and just make for a really good Q3 and Q4. In terms of marketing spend, we've had questions as to whether we're going to spend or invest more in marketing. We're pretty pleased with the results in Q3 and Q4. And as a rate of sales, we haven't changed our marketing spend. It certainly seems like it could be a lever for us to use going forward. So we might experiment with some slight increase there. But we don't feel like we need to make any major investments in new marketing to drive traffic because the demand generation part of the business right now seems so strong.

Okay. That's great. And then just to double click on the second part of your answer on the store experience. Can you -- can you dive in there? What's worked? What can you expand? How much is left on the opportunity set within the storage themselves? Because clearly, NSP, to your point earlier, was very strong for the second quarter in a row along with a good comp.

It's Michael. On the store front, similar to marketing, we haven't made major investments there. But we do have a pretty strong test and learn capability in our store organization. And what we did during the back half of the year is we targeted payroll investments to improve both store recovery and registered throughput really focusing on high-volume activity in the store. And we clearly saw some early successes that we can build on those learnings in 2026. The other thing that you'll see in '26, as we've discussed in the past, we've been piloting self-checkout actually for some time now, and we plan to expand to more stores given the positive results we've seen thus far.

And the next question comes from the line of Brooke Roach with Goldman Sachs.

Jim, I wanted to follow up on your marketing comments. As you assess the higher piece of traffic that's coming into the store, are you seeing any shifts in the age or household income demographic of your customer base? Is this a reactivation of lapsed customers? Or are these new younger customers coming into the store that can repeat?

It's a great question. Starting at the top side, we're very encouraged that we are seeing nice customer count growth, right? And it's hard to determine sometimes whether that's a "brand new customer" or a lapsed customer returning, but we are -- it's really exciting for us to have comp sales growth driven not only by transactions, but by customers finding Ross and we're really investing in the Ross brand. In terms of how those customers split by income and age, et cetera, it's -- once you push down to that level, the data becomes a little bit more complicated to read. We're very comfortable saying that we've seen growth very broad-based across income demographics, age demographics, including 18- to 34-year-old customers. We're pleased with our juniors business. We're pleased with our young men's business. So we feel good about the younger portion of the customer base, but overall, we're just quite encouraged to start to see some really nice acceleration in customer count.

Great. And then as a follow-up, can you share your latest view on the earnings algorithm for Ross on a multiyear basis? Are there -- is there anything that's structural preventing you from returning to a 14% operating margin over time?

Sure, Brooke. The algorithm is -- hasn't changed dramatically. We're -- new store growth, we have at 5%. And obviously, that would suggest -- this year, we're at 5% that we'd continue to grow both banners, and we think we can do that over time to maintain the new store growth there. Productivity Jim mentioned that we've seen heightened productivity built into our guidance this year is about 70% to 75% new store productivity of an average store. So that gets you to 3% to 4% growth. The EBIT margin, we've said historically, will get leverage between 3 to 4. Occupancies about 4%, SG&A is 3% to 4%. And then the stock repurchase is about 2%. It gets you to the about 8% to 10% long-term earnings growth.

And the next question comes from the line of Michael Binetti with Evercore.

Great quarter. So first quarter has been a source of underperformance for -- on a multiyear basis. You thought there was an opportunity to maybe come out of the holiday Jim and transition to a little more aggressively into the transition inventory. Can you help us understand within the context of the 7% to 8% comp then with the margins compressing on some of the biggest comps. Can you just walk us through -- is there something unique in the first quarter that you're kind of going forward to get to that 7% to 8% comp that isn't as much of an opportunity as you get out to the rest of the year? And is it something that you have to invest in to get there as we look at the margin? And then on the margins, if I look at 2025, that's coming in at 11.9% for the year, excluding tariffs, that was probably in the low 12s. This year, you're guiding 12.1 to 12.3 on the best comp guidance we've seen in a while and that's lapping some of the duplicative executive costs, the distribution center costs that wrap around for just 1 quarter, and then there's some reticketing last year. Can you just talk about what's conservative there or if there's a change to the to the long-term language of 15 basis points of expansion above the 2 to 3 points of comp or anything like that we should think about?

I'm happy to walk through this. So I would separate the EBIT margin. I would -- I'm happy to -- I would separate the EBIT margin in the first quarter from the comp because I think there's a distinct things that I walked through with -- we haven't lapped the DC. We have packaway pressure in the first quarter. And also, we had a lousy start last year. So we're working off a lower incentive base from last year. Those are really the things that are impacting EBIT margin in the first quarter. In terms of the 7% to 8% guidance, it's a reflection of certainly the momentum coming out of the fourth quarter, but also we're up against pretty weak compares, not only last year, as you mentioned, but over the last couple of years. And we think the initiatives we have in place, including, as I mentioned earlier, with inventory levels are having an impact in the first quarter and are sustaining. In terms of the back half of the year, nothing has really changed in our earnings algorithm for every point of comp over the guidance, it's worth about 10 to 15 basis points of EBIT margin.

And just to add, there's been questions for the last year about are we investing more in marketing or investing more in store labor as a rate of sales, both marketing and for labor are very much in line with last year. We don't intend to sort of buy the comp in Q1 or for the year going forward. I think Michael answered the flow-through question better than I could have. But -- if and when we decide at some point to overinvest in part of the business, hoping for an ROI on it, we will signal that. But at the moment, we're getting some really nice growth without making artificial investments.

And the next question comes from the line of Mark Altschwager with Baird.

Could you expand on the higher new store productivity you're seeing? Is that a function of the markets you're entering that are perhaps higher rent, but structurally higher sales per square foot? Is it a reflection of the operational improvements you cited in the prepared remarks? Just what are the key factors there?

We are -- first, I'd say it's -- overall, it's not just the new markets. We're seeing it across the regions, even some of our try it in true regions in California, Florida and Texas. And I think it is a reflection of some of the things we're doing in existing stores being more aggressive out of the gate in new stores and seeing it pay off. That said, to your point, we are entering more populated higher rent markets, and we're very pleased with our entry and are seeing great performance there.

And then following up on the branded strategy and the success in ladies apparel. Can you talk about the road map for replicating that success in other categories? What's the next area of focus?

Well, the brand strategy cuts across the whole store, probably most prominent within the ladies business. But as we talked a bit in the prepared remarks, the growth for the quarter -- actually for you for the last few quarters, was very broad based. And as I look at comps by merchandise category between men's, Ladies, kids, the whole Synacor set of businesses, cosmetics and shoes, all very strong. Home has really regained its ground. It slightly comp eroding. But given where it started at the beginning of the year, it's very much in play for helping us drive a very strong fourth quarter comp. So it's not really a sequential rollout between Ladies and the other businesses. And I think it's kind of now in our DNA. Now we're just kind of looking forward as to how we how we grow our business going forward quarter-to-quarter. But again, nearly every piece of our business actually, every major merchandising category was solidly positive with a very strong business in outerwear, which was a bigger business for us this quarter than it's been in the past. So it's very broad-based.

The next question comes from the line of Simeon Siegel with Guggenheim.

Really nice job. Jim, just following up on the last one. When thinking about the branded effort, any way to frame how AUR has been looking at a category level. So just to -- before accounting for any category shifts because in the categories that you're working after, how AUR looks? And then any -- did you guys quantify the new store versus maintenance CapEx within next year's guide?

On the AUR, our AUR increase was pretty modest in the quarter. I think we've called out basket -- a modest increase in the basket, but most of the comp coming from transactions. The UPT was flattish versus last year. So you could surmise that AUR was just a modest increase as well. It was a little disproportionate to the part of the business that got hit hardest by tariffs, which was home. So home was up. The other businesses didn't see that much of an AUR increase I think if we had a learning coming out of the quarter is that we probably have the ability to push for either higher-priced goods or potentially taking some retails up. But what's made us successful for years and years is having the best bargains in retail and always maintaining our umbrella relative to mainstream retail.

So we're going to focus on that for sure. But we probably have gained some confidence in shifting our assortment to, again, slightly higher priced goods, new goods, not like-for-like and higher prices and maybe in certain targeted places, if we feel like we have merchandise categories that are margin eroding increasing AUR a little bit to recapture some of that. So we feel just really well positioned as we start 2026. We're excited about the current growth, but there's -- they're seemingly another dozen levers that we can pull for additional growth going forward.

And then regarding capital, right, the best way to probably think about it for us is maybe think about 1/3 each for DCs and new stores and maybe 25% for store maintenance and the balance for technology enhancements to merchandising tools and initiatives and other things that are going to support long-term growth.

And the next question comes from the line of Ike Boruchow with Wells Fargo.

This is Juliana Duque on for Ike. I wanted to ask if you've seen any changes in the type of consumer shopping you've been seeing across both the brands whether that's between the good, better, best towards branded or any other commentary to get there?

The quick answer, I would say is no. The composition of our customer base seems to be very much intact. We've seen growth across essentially all pieces of it in terms of income levels age different ethnicities. So to tease out any minor differences, it would be kind of unnecessary. It's been an overarching rising tide, I think, for essentially all customers.

And the next question comes from the line of Dana Telsey with the Telsey Group.

Congratulations on the very nice results. as you talked about expanding dd's, I believe, going from 10 new store openings in '25 to 25 in '26. Is it the same strategies that give you confidence in dd's and that you're seeing the results on and is there any changes either to cost of stores, size of store and dd's that you're seeing? And is the better the best -- the good, better, best strategy, how it is applied to dd's. And just lastly, new store openings cadence this year? How do they flow through? And what percentage of the stores will be in the Northeast this year.

Dana, on dd's, what really gives us confidence is the underlying merchandising strategies that we've been working on in the last couple of years and certainly the overall performance of dd's, which has, like Ross has had very, very strong trends. On the reacceleration, no change in store size. Like Ross, we're seeing very strong new store performance, which also gives us confidence. This year's new stores are primarily in some of their older markets. We were able to take advantage of some writing bankruptcy deal that helped shore up the pipeline for this year.

In terms of cadence, I think it will be more weighted to the summer and fall opening groups. I think those are going to be pretty even with about, I think, we said 17 new stores in the first opening window.

And the next question comes from the line of Marni Shapiro with Retail Tracker.

Are just want to follow up on Dana's comments on dd's. I was curious, did you see the same trends there as well. It was driven by traffic in our basket. And have you taken over the last year due to tariffs, any price increases at dd's? And then just one last follow-up on dd's. Do you have much of a home business there compared to Ross? Or is it smaller?

On the trends for dd's, I'd say they're very similar for us, including base and price increase increase.

And they have a very vibrant home business at dd's in line with the percent of total store they processed. The categories are slightly different. The mix of categories within home are slightly different. But it's a very strong part of that business as well.

And I remember when you guys were first tinkering with dd's and over the years as you played with dd's, you've had a larger kids business. Is that still true? Or is it more balanced today? Is it more like Ross?

I'm not sure I know the answer to that off the top of my head, but it's -- they also have a decent kids business, and we tend to not want to disclose sort of with such specificity of the size of each of our businesses.

Fair enough. Actually, don't disclose it, keep it to yourself. Thank you, guys. Best of luck in the first quarter. I [indiscernible] my question. No one needs to know the answers. Good luck with the first quarter.

And the next question comes from the line of Aneesha Sherman with Bernstein.

Great quarter. So you talked about capturing additional market share. Jim, you used the word inflection that you saw during back-to-school. You're obviously guiding for a step down in comp in the second half. You're facing some tougher compares. Can you talk about how you're thinking about how sustainable this accelerated level of comp is. Do you see it as you lap a year and then you go back to algo? Or do you see this as more sustainable as you're winning over new customers who can be a more permanent fixture in the comp growth going forward?

I'll take a crack at it, and then my partner will probably give a more conservative view. I don't -- look, we came out of a nice third quarter and we feel excited about our fourth quarter. We're clearly exiting Q4 with strength and putting up a -- we think, a nice guide for Q1. I don't think it's overly aggressive given where the business is. There are 2 schools of thought in retail. One is so you start lapping these numbers, you'll everybody looking at 2-year, you can put great numbers on top of great numbers.

I think sometimes that's true. I don't it's much too early as we sit here in the very beginning of March to prognosticate the back half of the year, and we have a guide that we just put out there. But there's another school of thought that says we're inviting new customers into the brand, the assortment and in-store experiences converting them into shoppers.

The in-store experience is better, they're returning more quickly word of mouth begins to spread, bringing even more customers in as comp store sales increases you naturally get more marketing dollars as we do it as a rate of sales. So you naturally get more labor to the stores look better and you can start spinning that proverbial flywheel or virtuous cycle or whatever. That's the school of thought that I come from. And the one that we're trying to sort of embed in the culture here, a growth orientation, getting all of the functional areas in alignment.

And when we look at the back half of the year, certainly this early, we want to remain conservative, but I see tremendous opportunity for us to continue to grow the business in a somewhat outsized way.

Helpful. Is it fair to say that your guidance encompass is the first school of thought where you're looking at the 2-year stacks or CAGRs and normalizing for that, but then you internally are pushing your bias to the second school of thought, where it's more sustainable?

Perhaps that's part of it. The other part of it is it's just so early. And we've had 2 nice quarters, but the 2-quarter part that weren't so great. And clearly, there's a lot going on in the macro environment right now. So we just felt it would have been irresponsible to be more aggressive for the balance of the year. And let's say that I think one of the stronger full year comps we've put out as a company in a while. So we thought that was -- should have been an indication of positive momentum.

And the next question comes from the line of Jay Sole with UBS.

I want to ask about market share in a different way. Jim, do you think you're taking market share from other off-price retailers? Or do you think it's coming more from traditional retailers? How do you see that?

Well, it's a giant retail market out there, of course. And I think the bigger forfeiture of market share is coming from mainstream retail. One of our other off-price competitors just posted a very solid quarter as well and they're a bigger business in it. So it would be [indiscernible] to say we're taking a lot of share from them. I think the share shift is more from mainstream retail to [indiscernible] and other places like that to off-price in general. And we would just like to get our fair share or of course, more than our fair share from that shift.

The next question comes from the line of Krisztina Katai with Deutsche Bank.

Congrats on a great quarter. you credited the branded strategy with sequential comp improvement. Can you just help contextualize for us how it's helping evolve your vendor base and strengthen the existing vendor relationships and then secondly, when thinking about the new cluster acquisition, how do you see their behavior in terms of spend or frequency of trips I think existing shoppers? Or just any early reads in terms of how you think about the stickiness of the newer customers that have been coming to you.

Yes. On the branded strategy, that's been in place for a while now, and we sort of anniversaried a couple of quarters ago. So the -- I think that team particularly in Ladies -- maybe across the wholesale, but particularly in Ladies, has really started to build some nice momentum there, and the underpinning of it was the branded strategy. But the rest of the business, though, there's been a whole bunch of different changes made to the assortment, some modest increase in inventory selection in the store. So it's not specifically the branded strategy in every particular business. I would say the sequential improvement in comps was much broader than just the branded strategy and included marketing changes, in-store merchandising and operational changes, bringing the store experience up a couple of levels.

So a shopper would feel like the store was tidier and that you get in and out more quickly, et cetera. In terms of the customer count and customer frequency behavior, we simply just don't have enough good data to say our current customer shopping more frequently? Or is it all new customers? Or is it lapse customers, we -- in some of the same sets of data that you all receive from the credit card tracking companies we get some pretty specific data on customer cards and card numbers, and then we have to sort of make sense of all of that. But it's hard to then say, is that the same customer shopping with a different card or the new customers or lapsed customers, a different card, et cetera. When you zoom out a little bit and open aperture a little bit, it is clear to us that we're starting to build customer count growth, and that's exciting for us. That answer your question? We may have lost for. I think that's the end of the queue. John, are you there?

Yes. Our final question comes from the line of John Carden with William Blair.

Just Jim, you alluded to this thought that those going to be this big increase in marketing, increase in store investment and you're proving kind of comp acceleration with leverage if you look at kind of the fourth quarter. You mentioned some of the things that are blocking out the first quarter. But I'm curious on what the right way to think about marketing and store investment is go forward. Is it that there's a more flexible nature of marketing, more variable nature to marketing there you can kind of be more nimble in any given period and the store investment is just minute or simple in nature and kind of tails off or you'll be more focused on keeping it fresh go forward? Sort of what is the right way to think about this.

Happy to answer that. I'm not sure what I said that led you to that conclusion. I thought I said almost the exact opposite of that, which is we have not made investments outside investments in marketing or access investments in store labor. And we've gotten the comp growth that we've gotten within the confines of the operating model and coming out of Q4, which is a really nice leverage based on the fact that we haven't made those investments.

I do think going forward, we might experiment a little bit, but still within the confines of the operating model of should we pick up marketing slightly, not meaningfully, but slightly. We're always doing targeted investments to -- Michael talked a lot about test and learn. If we do certain things in a store with store labor, either some additional hours or reallocating hours what's the benefit to the way the store looks or how fast we move through the queue line. So we'll be experimenting going forward. But I would hope that the takeaway from the call is we've been achieving some really nice, I'd say, outsized comp sales growth in Q3, Q4 and our guide for Q1 without having to do any unnecessary or artificial investment in either marketing store labor or CapEx.

I think those levers exist out there for us, and we might -- if we can find ROI on them, we might start playing with those, but it was funny. It was on this call last year where we said we're going to look to try to do all of these things expense neutral. And I think we've achieved that 12 months later, as we go forward, I'm in my second year, the team has really come together nicely the 2 chief merchants that have now been in their roles for a year are both doing unbelievably well. And we're sort of just hitting our stride in building momentum going forward. So for 2026, a lot more opportunities going forward. As Michael teases me all the time, the best is yet to come.

This now concludes the question-and-answer session. I would like to turn the floor back over to Jim Conroy for any closing comments.

So thank you, everyone, for joining us on today's call, and we look forward to speaking with you on our next earnings call. Take care.

Thank you, ladies and gentlemen, that does conclude today's conference call. We thank you for your participation. Please disconnect your lines, and have a wonderful day.

Good afternoon, and welcome to the Ross Stores Third Quarter 2025 Earnings Release Conference Call. The call will begin with prepared comments by management followed by a question-and-answer session. [Operator Instructions]

Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call will contain forward-looking statements regarding expectations about future growth and financial results, including sales and earnings forecasts, new store openings and other matters that are based on the company's current forecast of aspects of its future business. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from historical performance or current expectations. Risk factors are included in today's press release and the company's fiscal 2024 Form 10-K and fiscal 2025 Form 10-Qs and 8-Ks on file with the SEC.

And now I'd like to turn the call over to Jim Conroy, Chief Executive Officer.

Good afternoon. Joining me on our call today are Michael Hartshorn, Group President and Chief Operating Officer; Bill Sheehan, Executive Vice President and Chief Financial Officer; and Connie Kao, Senior Vice President, Investor Relations.

As noted in today's press release, we are very pleased with our third quarter sales results, which accelerated from the prior quarter. Total sales for the period grew 10% to $5.6 billion, with comparable store sales increasing a strong 7%. Our merchants delivered a compelling assortment of brand name values, which led to broad-based growth across all major merchandise categories. Those assortments, coupled with our new marketing campaigns drove excitement, higher customer engagement and increased store traffic. We had an excellent back-to-school selling season with strong trends that continued through the balance of the quarter. Additionally, the stores and supply chain organizations executed extremely well to support the elevated sales and inventory flow. The strength in top line, coupled with our continued focus on expense control, resulted in an operating margin of 11.6% that was much stronger than expected.

Earnings per share for the 13 weeks ended November 1, 2025, were $1.58 on net income of $512 million. Included in this year's third quarter earnings is an approximate $0.05 per share negative impact from tariff-related costs. These results compared to $1.48 per share on net earnings of $489 million in the prior year period. For the first nine months, earnings per share were $4.61 on net earnings of $1.5 billion compared to $4.53 per share on net income of $1.5 billion for the same period last year. Included in year-to-date 2025 earnings are an approximate $0.16 per share negative impact from tariff-related costs.

Sales for the year-to-date period grew to $16.1 billion with comparable store sales up 3% over last year. For the third quarter at Ross, cosmetics, shoes and ladies were the strongest merchandise areas. By geography, we saw broad-based strength with the Southeast and the Midwest performing the best. dd's DISCOUNTS strong value and fashion offerings continue to resonate with its shoppers and delivered comp gains relatively similar to Ross for the period. At quarter end, total consolidated inventories were up 9% versus last year and average store inventories were up 15% as we advanced the inventory build for the holiday season into the tail end of October. Packaway merchandise represented 36% of total inventories compared to 38% last year. We feel very good about the health and levels of our inventory and are well positioned to deliver a broad assortment of values this holiday selling season.

During the third quarter, we opened 36 new Ross and 4 dd's DISCOUNTS stores. Similar to our summer opening group, we are pleased with the performance of our fall openings, particularly the results in the new markets, including the New York Metro area. The openings in the third quarter completed our expansion program for 2025. For the year, we added a total of 90 locations comprised of 80 Ross and 10 dd's. We plan to close and/or relocate 10 locations in the fourth quarter and expect to end the year with 1,903 Ross stores and 360 dd's locations.

At this point, I would like to provide an update on our branded strategy, which has now been fully embedded in our merchandising approach for more than a year. Over this period of time, the merchants have been laser-focused on delivering high-quality branded bargains at compelling values. They've been able to deliver an assortment that spans good, better and best brands to ensure that we are providing exceptional values to our diverse customer base. We would attribute a portion of the sequential improvement in the business to the successful implementation of the branded strategy. This strategy has particularly helped the ladies business, which further accelerated this quarter and comped above the chain average. Additionally, the increased emphasis on brands has further strengthened our vendor partnerships and increased closeout opportunities. These efforts not only drove higher sales, but also helped us partially offset tariff impacts, resulting in better-than-expected merchandise margins for the third quarter.

While tariff uncertainties persist, we are encouraged by the exceptional product availability in the marketplace. This has enabled us to secure opportunistic buys that position us favorably for the holiday season. As a result, we now expect tariff-related costs in the fourth quarter to be negligible.

From a pricing perspective, it is clear the consumer is prioritizing value and our updated assortment is driving stronger customer engagement. While pricing has increased across the retail environment, our commitment to delivering value remains unchanged. We will continue to maintain a strong value proposition relative to traditional retailers while working to mitigate the impact on our merchandise margin.

Bill will now provide further details on our third quarter results and fourth quarter guidance.

Thank you, Jim. As previously stated, comparable store sales rose 7% in the quarter. The gain was a result of both higher transactions and a larger average basket size. Operating margin decreased by 35 basis points to 11.6%, mainly due to the impact of tariffs. Cost of goods sold increased by 35 basis points in the quarter. Distribution costs were higher by 60 basis points, primarily due to the opening of a new distribution center earlier this year and tariff-related processing costs. Merchandise margin deleveraged by 10 basis points, while buying expenses were flat compared to the prior year. Partially offsetting the higher costs in the quarter were lower domestic freight and occupancy costs of 25 and 10 basis points, respectively. SG&A costs were flat year-over-year despite the headwinds from CEO transition costs. During the quarter, we repurchased 1.7 million shares of common stock for an aggregate cost of $262 million. We remain on track to buy back a total of $1.05 billion in shares this year.

Now let's discuss our fourth quarter guidance. We're encouraged by our business momentum as we enter the critical holiday season. As a result, for the 13 weeks ending January 31, 2026, we are raising our comparable store sales forecast to be up 3% to 4% with earnings per share in the range of $1.77 to $1.85. This updated guidance range reflects approximately $0.03 earnings per share of unfavorable timing of packaway-related expenses that benefited the third quarter. Based on our year-to-date results and updated fourth quarter forecast, we are increasing our earnings per share guidance for fiscal 2025 to be in the range of $6.38 to $6.46. As for tariffs, we now forecast the fourth quarter impact to be negligible, leading to a full year cost of approximately $0.16 per share. These estimates are based on the current level of tariffs. In addition, and as a reminder, 2024 fourth quarter and full year earnings per share of $1.79 and $6.32, respectively, included a benefit of approximately $0.14 in earnings per share related to the sale of a packaway facility.

The operating statement assumptions that support our fourth quarter guidance include the following: Total sales are projected to increase 6% to 8%. We expect operating margin to be in the range of 11.5% to 11.8% compared to 12.4% last year. The year-over-year change primarily reflects last year's benefit from the sale of a packaway facility that was worth about 105 basis points. Net interest income is estimated to be about $30 million. Our tax rate is expected to be approximately 24% and weighted average diluted shares outstanding are projected to be about 322 million.

Now I'll turn the call back to Jim for closing comments.

Thank you, Bill. To sum up, we are pleased with our third quarter results and encouraged by our sales momentum. With a strong merchandising plan and a terrific product assortment in place, we are optimistic about our prospects for the fourth quarter. Additionally, the store and supply chain teams are well positioned for the holiday season, and our marketing campaigns have continued to build excitement. We believe that this multifaceted approach will help us continue our positive momentum and enable us to capture additional market share.

Finally, I would like to thank the entire organization for their hard work and solid execution, which enabled us to deliver a strong third quarter performance. Despite the ongoing challenges and uncertainty in the macro environment, we remain focused on our core strategies and executed well as a cohesive team across the entire company.

At this point, we would like to open the call and respond to any questions you might have. John?

[Operator Instructions] And the first question comes from the line of Matthew Boss with JPMorgan.

Congrats on a really great print. So, Jim, could you help break down the inflection in same-store sales or the 500 basis point sequential acceleration that you saw? How much would you attribute to company-specific initiatives as we think about marketing or the early stages of store experience relative to the macro backdrop? And could you just elaborate on the strong momentum that you cited in November that supported the fourth quarter raise?

Sure. It was a really nice sequential improvement. And I think in the prepared remarks, we used the word broad-based. So the merchandise categories every single merchandise category in the third quarter, every single major merchandise category anyway was positive or nicely positive. We had some businesses in the second quarter that were somewhat underperforming, and they've really caught up. And we've seen some really great improvement in most categories across the business.

We also had broad-based strength across the country in terms of our geographic regions, including regions that you would otherwise think would be under pressure. So broad-based strength across the business. How much of it is internal versus external? It's hard to say. We acknowledge that there probably has been some tailwinds out there. Some people are calling out that weather may have been a help. Last year, we called out that weather was a hindrance to our business a little bit. But then in terms of headwinds, there's a whole bunch of other macro uncertainties that have probably left consumers a little bit uneasy in their shopping.

So I give a lot of credit to the team. The product team leads the charge. The assortments look fantastic. They've navigated through tariffs and very strategically have maneuvered AURs. The marketing team has done a very nice job. The stores team has stepped up really the whole company. So it's -- I'm sure there might be something in the macro backdrop that's a tailwind to us, but I also give some credit to the team for just executing extremely well.

And the next question comes from the line of Corey Tarlowe with Jefferies.

Congrats on the strong results. Jim, I just wanted to hone in on this element of change. And you've come into the business, and we were comping flat to start the year, and we've really substantially accelerated. And I wanted to get a flavor for what, in your view, are the major drivers of this improvement in the momentum? And then what do you think is perhaps the stickiest of all of these changes that is going to propel the business on a multiyear trajectory for continued growth and improvement in outperformance?

Sure. Happy to have a shot at that. First, I'd start with, I absolutely inherited a strong company that was being managed extremely well. So the company has been growing for years before I showed up. The first quarter was a bit of an anomaly, right? We had a lot of macro headwinds that pushed the business to a flat after a challenging latter part of January and a very challenging February, which we called out last year.

In terms of some of the things that have changed, it's not very different than my remarks on some of the first couple of investor calls. The merchandising team is extremely sophisticated and some of the best merchants in the world work for Ross, and that strength continues to propel the business forward.

If I added anything to the business is to sort of raise or amplify the voices of the marketing group and the stores team, so we can drive more traffic from a marketing standpoint. And when they get to the stores, they can enjoy a slightly better or hopefully much better in-store shopping environment. And the overarching strategy is quite simple, which is just to get merchandising, marketing and stores, perhaps add supply chain to that mix, operating in unison. So we're all kind of pushing the business forward for more growth.

Understood. And then just as a follow-up, the new marketing campaigns have clearly resonated. What is it in your view that you think has materially helped to accelerate the amplification of all of these improvements that you've made in the business, particularly from a branded perspective, that's really working from a marketing standpoint and that's helping to amplify the message even more and resonate with consumers.

Sure, sure. Coming in as an outsider, there are some disadvantages. I wasn't an off-price person, and I'm not a true merchant. But perhaps if there was one advantage, it was a set of fresh eyes. So, from a marketing standpoint, we absolutely want to remain rooted in great branded values. But the challenge that I gave to the marketing team and to the new agency was how do we create cut-through in a -- with a refreshed marketing message. So we've really contemporized how we go to market in terms of a creative standpoint. We've tweaked the merchandise mix a bit. Notably, we haven't increased marketing expense, at least as a percentage of sales. But I think sort of this refreshed view of how you can look at the store and reach out to customers in a slightly different way and perhaps reach out to younger customers in a more aggressive way.

It seems to be taking root. We are encouraged by it. We're excited by it. We've seen some hard metrics improve, and we've seen some qualitative factors improve nicely. And I certainly don't want to dampen anybody's enthusiasm because it's fantastic to see. But let's just remember that it's only been a few months now, right? We've got a very busy holiday season to get through. And then we'll see why it becomes sticky in your mind.

Coming back to that part of your question, I think probably the stickiest thing ultimately will be the power of the Ross brand and just what that means for customers and the promise that it delivers to shoppers. And it's had a great legacy up to this point. And if I had any impact on it, it's how can we modernize it slightly, so we continue to resonate with all customers, particularly younger customers.

And the next question comes from the line of Mark Altschwager with Baird.

You're expecting tariff costs now to be negligible in Q4, which is great to hear. I was hoping you could update us on the mitigation efforts. What's working, what's giving you the comfort with your ability to fully offset? And with that, hoping you could speak specifically to the AUR trend you're seeing and also how we should interpret that Q4 guide as we think about the wraparound effects of tariffs for early 2026.

Mark, it's Michael Hartshorn. Similar to what happened in the second quarter, as you saw in our commentary, the tariff-related costs came in lower than we expected. And our merchant teams have done a tremendous job balancing cost concessions with modest market-driven price increases where we can maintain our value gap against other retailers. In addition, they were able to take advantage, given the closeout availability, take advantage of closeouts in the marketplace and chase above-plan sales.

As we expected, as we imagine the year when we had additional lead time from the initial tariff announcements and had open to buy to fill, our merchant teams have been able to mitigate the impact of tariffs, tariffs as we progress through the year. In addition, with some tariff stability, we've been able to normalize ticketing activities in our distribution centers.

For going forward, it's too early to speak for 2026, but barring any meaningful changes in the tariff policy, we would expect pricing stability, which would eliminate the need for our merchants to make pricing decisions against a moving target.

And then a quick follow-up on the comp acceleration. I believe you said consistency or you said strength across regions, but I'm wondering if there's any call out by demographic or income cohort.

Sure. And just to follow up on your question on AUR. So the comp components for the quarter, traffic, UPT and AUR all increased and transactions were the biggest of those. In terms of demographic performance, we called out in previous quarter our Hispanic stores during the quarter at both Ross and dd's stores that have what I'd say is high trade area Hispanic population saw an improvement that was similar to the chain from quarter-to-quarter and ended up posting solid comps despite trailing the chain slightly.

Other callouts, we did mention in the call, Southeast and the Midwest were our top-performing markets. In terms of bigger markets, California, Florida and Texas were all relatively in line with the chain.

And the next question comes from the line of Chuck Grom with Gordon Haskett.

On the marketing change, can we double-click on that a little bit? And do you think you're driving new or lapsed customers? Do you think you're increasing engagement with existing customers? Where do you still see opportunity on that front?

It's hard to tease out the components of the traffic. We do believe we're gaining some new customers and reengaging with lapsed customers. If you go through the analytics provided by Meta platform and you go through TikTok, I think it's safe to say we have improved our engagement. In terms of where we are in terms of our evolution from a marketing and branding standpoint, it's very, very early, right? We hired an agency in the beginning of the year. Their first output was in the July time frame. We've just released a couple of new spots for holiday that then translate across all the digital platforms as well. So very early innings. And Deepa and the marketing team have done an unbelievable job. But there's just even more in front of us, I think, for us to continue to learn and react to that and continue to deliver some great messaging.

That's great. And just as a follow-up, you noted that as a percentage of sales, you didn't increase the spend, but it's well known that you spend far less in dollars and as a percentage of sales relative to your largest peer. When you look ahead, do you think you need to grow that? Or do you think you continue to just reinvest and redeploy those dollars?

It's a good question. Right now, we're going to maintain our percent of sales where it is. We have a financial and operating model that I want to kind of work within. Clearly, if we can spur on more business and drive more customers and drive more sales even at the same rate, we'll get some more marketing dollars. So it's too early to say we'll invest any more in it. And right now, the amount we're spending seems to be paying dividends. So stay tuned for that. But there's no immediate plans for an increased spend there.

And the next question comes from the line of Lorraine Hutchinson with Bank of America.

Jim, you called out the branded strategy as a key driver of the comp acceleration. Can you talk about how this benefit has built over time and how much more opportunity you see going forward?

Sure. Absolutely. And if you want to go through the time line, in the fourth quarter last year, we had a decent quarter, and we called out the branded strategy touches everything, but it's probably most impactful to ladies. So if we just look at the ladies business and how it's sequentially changed over the last few quarters, last year, fourth quarter was pretty strong, but ladies was a drag on the comp. Then in Q1 and in Q2, the ladies business was slightly better, but still flattish and a slight drag on the comp in Q1. in Q2, it started to show some improvement. It was kind of in line with the company, maybe slightly comp enhancing. And in this most recent quarter, the entire business got better, substantially better. And the ladies business was actually comp enhancing. So if we posted a plus 7%, you can intuit that the ladies business was better than a plus 7%.

And how much more opportunity do you see -- yes, how much more opportunity going forward do you see in this ladies business from the branded strategy?

A fair amount, I think. I mean we -- as you know, we've been investing in that over four or five quarters. It had a drag on our merchandise margin that we thought would be an investment in the business. And that investment seems to be paying off now.

I think with very solid quarter under our belt, I'd like to think that for the next three quarters until we at least anniversary that, we'll see some outsized growth. And then, of course, that team has really started to build excitement, some great leadership there. And I think after -- even after we anniversary this quarter, I think they'll find some opportunities for more comp improvement. There's not a lack of ideas for innovation in that part of the business.

And the next question comes from the line of Paul Lejuez with Citibank.

Jim, sorry if I missed it. Did you say anything about the monthly cadence? Curious if you could share anything on that front, home versus apparel and specifically, not just performance, home versus apparel, but AURs in each of those categories? And then is there any quantification of how your customer base has changed? Like within that ladies business, can you isolate that you are getting a customer of a certain age that you did not previously have? Is there any quantification to that?

I'll just start on a couple of those, Paul. During the quarter, we had a very strong back-to-school and held the trend throughout the quarter. So throughout the trends were fairly consistent, and that was true for both Ross and dd's.

On the AUR, I said in a previous commentary that it was driven by increases in traffic, UPT and AUR with the traffic or transactions for us, the biggest of those. Traffic and the basket were very similar.

In terms of overall category performance, we mentioned children's and men's were relatively in line with the chain. cosmetics, shoes and ladies were best performers. Home was slightly below the chain average.

You also asked about shifts in business. The things we measure against usually, you see bigger trends over time. We certainly talked about demographics and the Hispanic customer. In terms of household income, the -- not only were the sales very broad-based across geographies and merchandise categories, they're also very broad-based across trade area income levels, and we did not see any significant shifts there.

And the next question comes from the line of Alex Straton with Morgan Stanley.

Congrats on a great quarter. Maybe just on -- maybe for you, Jim, on the upgrading the store experience. I think you highlighted that as an opportunity when you first started. Did any changes there play a role in the comp acceleration? And maybe how do you gauge effectiveness of those strategies? And what are your priorities on that front as you think about 4Q and into next year?

I can take that. We're addressing the store experience on a couple of different factors. First, we have begun refreshing -- we expect to refresh all stores in the chain, which we believe will provide a more modern look and feel for the customer. This includes new perimeter signing, wayfinding signage along with addressing cosmetic type repairs. We're halfway through the chain there. And though it's very early, the customer feedback has been good.

The other focus areas within the store is, you can imagine, improving line lengths and throughput through the front end of the store and also improving our recovery throughout the day. And we're finding places to get efficiencies within the store and then reinvest it in those focus areas. In terms of immediate impact in the quarter, I think it's very early days. And if anything, we'd expect to build momentum over time.

And the next question comes from the line of Brooke Roach with Goldman Sachs.

Jim, I wanted to get your thoughts on Ross's approach to value gaps into holiday and 2026 as market prices move up. How much of the AUR growth in the third quarter was driven by price actions versus mix? And are there any categories where you've taken action on pricing where you're starting to see any signs of consumer elasticity?

Sure. Happy to take it. In terms of the first part of your question, our strategy is, I think, a pretty typical off-price strategy of keeping an umbrella under traditional retailers in terms of pricing. we tend to be very intensely focused on the values that we provide, which is one of the reasons why we were a little bit slower to make any changes to AUR because we really wanted to underscore the customer that we were going to be delivering values, including during a tariff environment. And holding true to that, and we've called out tariff impacts in the last couple of quarters, although they're going away for the fourth quarter, but holding true to that sort of promise perhaps has helped us pull in some new customers or bring back lapsed customers. So we're excited about that.

I think Michael talked about in terms of transactions, AUR and UPT transactions was still the biggest driver of the comp. As we look at the fourth quarter, we have been pretty much bought up for the fourth quarter for a while. So I wouldn't expect any significant changes in our strategy from a pricing standpoint for the fourth quarter. I think it was encouraging that we were able to have a modest increase in our AUR and not see degradation in units per transaction. That was up a little bit and also continue to see transactions. So hopefully, that's answered the question.

I mean it's been a very difficult thing to navigate for the last several months looking at the changing in tariffs and the changes in the retail environment and trying to find exactly the right set of prices for every single category. Have we made mistakes within that? Probably. And it's -- what ultimately falls out of that is a business that is -- may start turning slightly slower, so you may mark it down and then you move through it. But on balance, we haven't had any significant footfalls that have created massively increased markdowns or slowdown in our terms.

And the next question comes from the line of Michael Binetti with Evercore ISI.

Congrats on a nice quarter. Jim, I guess as you look at marketing and some of the store refreshes and the state of the fleet today, as you look at some of the initial successes and the top line impact here, how do you think about what to invest in and accelerate those things that are working to keep the top line going versus how you think about flowing through some of the earnings on these initiatives to investors next year? I think just at the highest level, maybe some thinking on the trade-offs between pushing sales harder now you've got some things that are very obviously working and then flow-through versus investment next year.

And then separately, you've spoken a little bit about a strong pipeline of dd's stores in the past. How are the Ross banner stores in the Northeast area doing? And do you see an opportunity to accelerate store growth at both chains at Ross in addition to dd's?

Sure. Maybe I'll take the first one, and Mike will take the second piece of that in terms of store growth.

On the invest versus flow-through, yes, I'm not even here a year, and I was very cautious when I first got here to "listen, learn and lead", right? I really wanted to learn a new business, a much bigger business and the off-price sector, et cetera. And while I had some hypotheses for change as did the team, we -- I really wanted to be respectful of the financial model and the operating model that has been successful for the company for so long. So while we've made some changes over the last couple of quarters and perhaps we're seeing fruits of that -- of those changes now, I'd like to let some more time go before we come out and say, we're going to overinvest betting on the come for future results.

So anything we've done so far has been, again, within the expense structure, within the financial model the company has, and we haven't spent anything in an outsized way from a marketing perspective or really from a stores perspective outside of the sort of the capital plan that was here when I got here.

Three months from now, six months from now, if we continue to see positive ROI, to your point, we may then get more aggressive and say, look, if we can break the model slightly from a financial standpoint, will we deliver higher comps and additional earnings? Perhaps. But right now, I think we're all kind of committed to the operating model that's worked for the company for decades.

Michael, on real estate, first on this year's store openings. As we said in the commentary, we opened 80 Ross and 10 dd's. As an entire group, the new stores have outperformed our plan, and we're very excited, although it's very early with the success in both the Northeast and the New York stores and also in our Puerto Rico stores that opened over the summer.

So, as I said, what we've seen thus far, we're really optimistic about the Northeast expansion. We feel good about the real estate landscape. We have a very healthy pipeline. We've said before that we're going to reaccelerate the dd's growth. In terms of the combined groups, we'll have more to say when we get to the end of the year in our 2026 guidance.

And the next question comes from the line of Ike Boruchow with Wells Fargo.

Jim, I figured I would ask about self-checkout. I think it's something you've talked about in the past as a driver. Where -- how many stores is that rolled out to? How meaningful can that be maybe over the next 12 months? And just kind of how are you thinking about ROI on that investment?

Sure, Ike. It's in 80 stores today, and it's taken us a while to get to this point. We tried a couple of different models, and it's taken us a while to get the shrink aspect of self-checkout correct. We now have a prototype that's worked well for us over the last year, and we're not only seeing lower shrink, but we're seeing higher -- high customer adoption.

We're seeing sales impacts in the stores that we put it in, and we'll be rolling it out to further stores next year. How big, it will be depends on kind of the next phase of rollout, but where it works best for us is in our high-volume stores. So we'll continue to roll it out. We'll have more to say on how many of those stores in the '26 preview.

And the next question comes from the line of Adrienne Yih with Barclays.

Congratulations on the great acceleration into holiday. First question on dd's. Did you see any -- I mean, was it pattern very similarly to the Ross Dress for Less stores? Or did you see any pressure, particularly in the early part of November with the delay of the SNAP benefit. So has that rebounded?

And then secondly, you mentioned that the results fully offset all of the tariff, the gross tariff amount. So should we assume that, that obviously is the case for the fourth quarter, but that kind of the biggest impact because of your turns being so fast, that the biggest impact would have been felt in 2025 and we enter '26 in a pretty normal way state in terms of tariffs or there's probably a little bit of overhang in Q1?

Adrienne, on the dd's, dd's was very similar to Ross. The business was very consistent across the quarter. So there's nothing that I would call out there.

In terms of tariffs, we did say there continued to be an impact in Q3, but it will be neutral in Q4 as we've been able to chase the business with closeouts, we've been able to work with vendors on cost concessions. And I would expect it to be somewhat neutral. It is neutral in Q4 and expect it to be neutral as we move into '26.

Okay. And then my quick follow-up is just going to be, there are very few companies that are exiting the third quarter with overall sales growing faster than inventory on an average basis or even at the end of the quarter. Obviously, you've built some inventory up. The availability is fantastic. Is this just sort of do you feel -- I'm going to ask a question because I know the answer to. I mean, clearly, you can chase that inventory.

But I guess as you think about kind of like heading into spring, what are you seeing in terms of kind of being a little bit more maybe disciplined or judicious about taking some of that packaway? Any changes to strategy as we head into spring when we think that broader retail will raise prices across the board?

On the ending inventory, as we said in the commentary, we did end up 15% on the last day of the quarter. Actually, during the quarter, inventory was in line with sales, which similar to prior years, holiday shopping and promotions are well underway ahead of Thanksgiving holiday and in anticipation of those shifts, we set the sales floor for the holiday as we -- at the end of October, which is earlier than last year and also advanced some of the inventory into the store.

And the next question comes from the line of Dana Telsey with the Telsey Advisory Group.

Congratulations on the terrific results. As you take a look at your customer, particularly an assessment of the lower income customers, are you seeing anything -- are you seeing a trade down to the core Ross? What are you seeing in dd's?

And is there any difference in performance of the lower income stores in lower income areas versus others?

And then just lastly, with the expansion into the New York area or the Northeast, as you think about your store expansion plans for next year, will a greater portion of those stores be in the Northeast? And how do you see opening costs? And is there -- is the opportunity for greater sales from those stores in more dense areas, leveraging the cost given it may be a higher cost structure?

Dana, on the trade-down customer, it's really hard to peel apart in the data. We do measure the trade area demographics around the stores and the 7% comp was very broad-based across all income levels. So we didn't see any distinction between the lower, higher income customers.

In terms of entry into the Northeast, today, about 70% of our store openings are in what I call existing markets and 30% in newer markets, which would now include the Northeast and Puerto Rico over the last couple of years, it's included the upper Midwest. I'd expect that pace to continue, and we'll gradually continue to add in New York over time into Puerto Rico and continue to expand those markets.

We don't think our return on opening a new store will decline as we enter the Northeast. As you say, it's more dense population should drive higher sales to support the additional investment and higher cost in some of the store base there.

Got it. And then just one more thing, Jim, in terms of what you're seeing with the store refreshes, the brand enhancements that you're making in brand in general, other categories besides women's where you're seeing this opportunity for? And when you think about the store refreshes, anything that is particularly notable that you see as the opportunity for next year?

Well, we certainly have some ideas about next year, and we don't want to sort of necessarily divulge those just yet. In terms of categories that have improved, we've seen sequential improvement across a number of different businesses. Perhaps the one to call out is the home business was a drag in Q2 and was nicely positive in Q3. And we feel well positioned in that piece of the business as we go into the fourth quarter when it spikes as a percent of sales.

So I think that's maybe another category that we can talk about some of the wins that merchandise team has pulled together. And yes, I'm glad to hear the enthusiasm on store refreshes and the stores, I think, are looking a bit better. I would come back to some of my earlier comments that it's still very early innings in some of these changes. So maybe that just is good news in terms of the best is yet to come.

And the next question comes from the line of John Kernan with TD Cowen.

All right. Congrats on the great quarter, guys. Just wanted to circle back to gross margin. The merch margin was down slightly. You're now lapping a lot of the initiatives in the branded segment. I'm just curious what you think the opportunities for merch margin are going forward. You are comfortably above the levels you were at pre-COVID as a benchmark. I'm just curious what you see as long-term drivers. And I just have a quick follow-up on distribution costs.

I mean, like you said, merch margin although it declined, it was a little better than we expected as we had less ticketing and some stronger shrink results helped there. Moving forward, it's an area of continued focus. And certainly, we would like it to get better. But I think currently, we'd expect it to be relatively stable over time.

I think there is -- we talked about we're 1.5 years into the brand strategy. I think there's going to continue to be opportunity to gain some leverage as we move through time as we've built the branded relationships with the vendors, gives us opportunity for closeouts. So I think there's still some opportunity there.

Within gross margin, the transportation cost will be a year-to-year kind of market-based discussion. But I think there's ongoing improvement capture in merchandise margins.

Obviously, the new DC seems to give you a lot of capacity. Just curious on distribution deleverage. Is that something that continues into next year? It looks like it picked up in Q2 this year, and I'm assuming it continues a little bit in the fourth quarter.

Yes. In Q3, that deleverage, like we've talked about a bit before, the full impact of the opening of a new distribution center and also some tariff-related processing costs. As we move forward, we'd expect that pressure from the new DC continued, but that pre-ticketing pressure we've seen before related to tariffs should improve a bit. So we'd expect just a slight headwind in Q4.

And as we grow capacity, we look beyond this year, we'll be able to continue to lever that new capacity until we open our next distribution center, which is two to three days away.

And the next question comes from the line of Aneesha Sherman with Bernstein.

I want to follow up on the brand strategy. As you've discussed it in the past, you've talked about not changing the good, better, best mix, but rather increasing the availability of branded goods versus unbranded and label. As you're now attracting new customers and growing AUR and basket size, are you rethinking that and potentially considering adding more higher-end brands to expand the mix on the higher side?

And then a follow-up on Home. Jim, you talked about Home getting better this quarter, though it was still weaker than the chain for two quarters in a row. Have you pulled back on the assortment at all in response to that weakness? And are there any implications there in terms of holiday and gifting and home decor assortment going into the holiday period?

Of course. On the Home piece, absolutely not. We feel that the Home business is really building momentum and the team there has just created tremendous sequential improvement. As we get into the fourth quarter, the categories change a bit, right? We -- toys increases quite a bit, food increases, et cetera. So those businesses kind of have nothing to do with the incoming trend line, and we feel extremely well positioned from a gifting standpoint and from a toy standpoint.

In terms of branded versus unbranded, a couple of points, I guess, I would say is we've -- over the last several years, right, the reason the brand strategy was put in place and certainly predated me was there was a notion that the company had migrated away a little bit too much from known brands chasing higher margin or higher markup kind of tertiary players, and we needed to right that ship. That doesn't always mean higher-end brands, though, right? There are some really great brands at all price points within the store -- and we have a very diverse customer base in every definition of that term. So we want to have the best branded values for a good, better or best pricing tier.

Is there some opportunity to stretch higher? Perhaps. The merchants are always out there looking for the next new brand. It's always a small celebration within the buying office when we've opened a new brand and we've gotten access to new closeouts, et cetera. And over time, perhaps that will be -- that will include reaching up a little bit. But I would say it's across the board.

And the next question comes from the line of Marni Shapiro with Retail Tracker.

Congratulations on a great quarter and congratulations on the New York store. I hear it is the place to be. I'm just curious on the marketing. It's what I'm hearing. It's what my people say. So I'm so curious on the marketing side as you kind of dive a little bit more into marketing, two things. Will you, at some point, consider a loyalty program? And how -- what would that look like if you thought about it? And are you doing even some of the more basic stuff like e-mail or phone number capture so that you can more directly talk to your consumers?

So I'm not sure about the loyalty program. On the e-mail and text, we do have a pretty decent e-mail database in existence today, a few million active e-mail addresses -- and while we don't constantly update that number to the Street, we saw a really nice increase in active e-mails over the last quarter. So that was great. We don't have an active text program at the moment. But who knows? We're -- the first order of business from a marketing standpoint was to experiment with some slightly different messaging and maybe a slightly more contemporary aesthetic. And over time, we might try some of these other ideas.

Yes, the Brooklyn store has been just great addition to the portfolio. I'm glad it's the place to be seen. We've seen a lot of interesting people come in recently, and we're constantly kind of spying on it with our CCTV. So we kind of know everybody that goes in and out. But yes.

[indiscernible]

Yes, yes. No, everybody competitors, everybody. So that store has been a really nice arrow in the quiver. And who knows what it bodes for future stores there. I mean that particular location is pretty unique, very high traffic. There are other stores that we've seen open up in that area in the New York metro area that have had very strong openings, perhaps that would probably be the outlier one, the one in Brooklyn that you're talking about.

We have time for one last question coming from the line of Jay Sole with UBS.

Jim, my question is about the guidance because you're guiding to 3% to 4% comp. And if I look back ex the post-COVID period, the company hasn't guided above the 2% to 3% in at least 10 years. I'm just wondering what this signals. I mean, are you taking a different approach to guiding now being CEO? Or is it just that the quarter-to-date trends you're seeing are so good that you just felt like 2% to 3% just wasn't even relevant and you had to guide to 3% to 4%, because sometimes the thought is that the guide as much as internal signals and external signal, sort of a signal to sort of plan conservatively and then just be prepared to chase, keep a lot of open liquidity if opportunities materialize in the quarter.

So just kind of wondering how you're thinking about guiding and why you decided to go to 3% to 4% instead of just sticking to the same old 2% to 3%.

Jay, it's Michael Hartshorn. It's probably less tricky than you think. It is our internal plan. So currently coming off a 7% comp, that's how the underlying business is planned. And we always try to align the internal latest forecast with the plan. So there's no change in methodology. It is really how we're planning the business for the fourth quarter based on the momentum in Q3.

There are no further questions at this time. And I would like to turn the floor back over to Jim Conroy for closing remarks.

Very good. Well, thank you, everybody, for your interest in Ross Stores. We wish you all a very happy holiday season. Take care.

And thank you. That does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.

Good afternoon, and welcome to the Ross Stores Second Quarter 2025 Earnings Release Conference Call. [Operator Instructions]

Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call will contain forward-looking statements regarding expectations about future growth and financial results, including sales and earnings forecasts, new store openings and other matters that are based on the company's current forecast of aspects of its future business. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from historical performance or current expectations. Risk factors are included in today's press release and in the company's fiscal 2024 Form 10-K and fiscal 2025 Form 10-Q and 8-Ks on file with the SEC. And now I'd like to turn the call over to Jim Conroy, Chief Executive Officer.

Good afternoon. Joining me on our call today are Michael Hartshorn, Group President and Chief Operating Officer; Adam Orvos, Executive Vice President and Chief Financial Officer; [indiscernible], Group Senior Vice President and Deputy Chief Financial Officer, and Connie Kao, Group Vice President, Investor Relations.

I'd like to begin the call by recognizing the efforts of the entire Ross organization this past quarter. Despite ongoing uncertainty in the external environment, the team's dedication and hard work have been truly commendable. Their commitment has helped us to adapt quickly, execute on our ongoing initiatives and deliver a solid quarter.

Now let's turn to our second quarter results. As noted in today's press release, we are encouraged by the sequential improvement in sales trends relative to the first quarter. This improvement was broad-based with a positive change in trend in nearly all major merchandise categories and most of the regions across the company. During the second quarter, sales in May were strong and softened in June before rebounding sharply in July. We were pleased to see the improved trend at the end of the quarter particularly with the early sales performance related to the back-to-school selling season, which bodes well for the third quarter. We ended the period with second quarter sales in line with our expectations, while earnings modestly exceeded the high end of our guidance range due to lower-than-expected tariff-related costs.

Operating margin decreased 95 basis points to 11.5% compared to the prior year period, primarily reflecting tariff-related costs. Total sales for the period grew 5% to $5.5 billion, up from $5.3 billion last year, with comparable store sales up 2%. Earnings per share for the 13 weeks ended August 2, 2025, were $1.56 on net income of $508 million. Included in this year's second quarter earnings is an approximate $0.11 per share negative impact from tariff-related costs. These results compared to $1.59 per share on net earnings of $527 million in last year's second quarter.

For the first 6 months, earnings per share were $3.03 on net income of $987 million. These results compare to earnings per share of $3.05 on net earnings of $1 billion for the first half of 2024. Sales for the 2025 year-to-date period grew to $10.5 billion, up from $10.1 billion in the prior year. Comparable sales for the first half of 2025 were up 1%.

In the second quarter, cosmetics was the best merchandise area by geographic region, the strongest markets for the Southeast and the Midwest. Overall comp store sales at dd's DISCOUNTS were solid and ahead of Ross, while monthly trends were closely aligned between the 2 trains throughout the quarter. It was encouraging that both chains saw growth in both traffic and basket size with strong momentum exiting the quarter. At quarter end, both total consolidated inventories and average store inventories were up 5% versus last year. Packaway merchandise was 38% of total inventories at quarter end compared to 39% last year. We feel good about our inventory levels and believe we are well positioned for the back half of the year.

Turning to store growth. In Q2, we opened 28 new Ross and 3 dd's DISCOUNTS locations. These openings reflect our expansion into new and existing markets. New market entries included several stores in the New York Metro area as well as our 3 inaugural stores in Puerto Rico. We remain on track to open a total of approximately 90 new locations this year, comprised of about 80 Ross and 10 dd's. As usual, these numbers do not reflect our plans to close or relocate about 10 to 15 older stores.

Before I turn the call over to Adam to provide further details on our financial performance and guidance, I wanted to provide an update on tariffs. While tariffs remain at elevated levels, we feel good about the progress the merchants have made to mitigate the impact on margins. The team has worked tirelessly to execute a multipronged approach, including vendor negotiations, diversifying our sourcing mix and adjusting prices strategically.

Additionally, we were able to expand the portion of our business driven by closeouts, which further mitigates the impact. Looking ahead, we are confident that we can continue to offset most of the impact of tariffs but we do anticipate modest pressure in the third quarter, which we expect will be further mitigated in the fourth quarter. From a pricing perspective, we are beginning to see higher prices across the retail industry.

With this backdrop, we are focused on maintaining our value proposition relative to traditional retailers, while balancing the opportunity to preserve our merchandise margin. Our top priority will always be providing high-quality branded merchandise at outstanding value. The off-price sector has historically benefited from disruptions within the supply chain and the retail industry we believe this time will be no different. I will now turn the call over to Adam to provide further details on our second quarter results and additional color on our outlook for the remainder of fiscal 2025.

Thank you, Jim. Second quarter operating margin decreased 95 basis points to 11.5% and included an approximate 90 basis point negative impact from tariff-related costs. Cost of goods sold during the period increased by 70 basis points. Distribution costs deleveraged by 55 basis points, primarily from the opening of a new distribution center in the second quarter and tariff-related processing costs. Merchandise margin decreased 3 basis points, which included the impact of tariffs and occupancy deleveraged 10 basis points, partially offsetting these higher costs were lower domestic freight and buying costs of 15 and 10 basis points, respectively.

For the period deleveraged by 25 basis points, partly due to CEO transition costs. During the second quarter, we repurchased 1.9 million shares of common stock for an aggregate cost of $262 million. As a result, we remain on track to buy back a total of $1.05 billion in stock for the year. Now let's discuss our outlook for the remainder of 2025. As Jim noted in today's press release, given the uncertainty associated with the macroeconomic environment, we will maintain a somewhat cautious approach to planning our business for the balance of the year.

For both the third and fourth quarters, we are planning comparable store sales growth of up 2% to 3%. If sales perform in line with this guidance, third quarter earnings per share are expected to be in the range of $1.31 to $1.37 versus $1.48 last year. and $1.74 to $1.81 for the fourth quarter compared to $1.79 in 2024. These ranges include a negative tariff cost of approximately $0.07 to $0.08 and $0.04 to $0.06 per share in the third and fourth quarters, respectively. These estimates are based on the current level of announced tariffs. If the second half of 2025 performs in line with these projections, Earnings per share for the full year are now forecast to be in the range of $6.08 to $6.21 versus $6.32 last year.

For fiscal 2025, we anticipate an approximate $0.22 to $0.25 per share impact from announced trade policies. As a reminder, last year's fourth quarter and fiscal year results included a onetime benefit to earnings equivalent to approximately $0.14 per share related to the sale of a packaway facility. Now let's turn to our guidance assumptions for the third quarter of 2025. Total sales are forecast to increase 5% to 7% versus the prior year. We expect to open 40 stores during the quarter, including 36 Ross and 4 dd's locations.

Operating margin for the third quarter is planned to be in the 10.1% to 10.5% range which includes a 50 to 60 basis point negative impact from tariff-related costs. Our forecast also reflects unfavorable timing of packaway-related costs and continued deleverage from the opening of a new distribution center in the quarter.

Net interest income is estimated to be approximately $27 million. The tax rate is projected to be about 25% and diluted shares outstanding are expected to be approximately $30 million. Now I will turn the call over to Jim for closing comments.

Thank you, Adam. We are encouraged by the sequential improvement in sales trend relative to the first quarter. particularly the strength of our early back-to-school business in July. We believe pricing will move higher across the entire retail landscape, leading consumers to seek more value this fall season. As such, we are positioning our assortments to deliver high-quality branded merchandise at compelling price points to reinforce our value proposition. We strongly believe this breathens our competitive position to capture market share over the balance of the year. Before we turn to your questions, I would like to take a moment to recognize and thank Adam Orvos for his contributions to Ross.

As many of you know, Adam is retiring from Ross at the end of September. His leadership and financial expertise have been instrumental to our success, and we wish him well and this exciting new chapter. We also appreciate Adam working closely with Bill to ensure a smooth transition. At this point, we would like to open the call and respond to any questions that you may have. John?

[Operator Instructions] And the first question comes from the line of Matthew Boss with JPMorgan.

And nice to see the improvement. So Jim, could you speak to notable areas of sequential top line improvement that you saw and elaborate on the sharp rebound in July and early back-to-school trends that you're seeing, maybe relative to your 2% to 3% comp guide, which I think you said embeds a somewhat cautious planning approach. And then just for Adam, gross margin drivers in the third and fourth quarter. If you could just help break down relative to the 70 basis point decline in the second quarter. I think would be really helpful.

Is that your 1 question, Matt?

Trying my best for you, Jim.

On the first part of your question, I'll give you some color on the specifics. But the most encouraging thing was we've seen broad-based sequential improvement from the first quarter into the second quarter. it's nearly every merchandise category improved and most were positive in the second quarter and towards the tail end of the second quarter, particularly in July, nearly everything was turning positive or was positive. So we feel very good about that. And if you went back even to the end of the first quarter, we had called out that we had sequential improvement from February to March, March into April. Part of that was the Easter shift. We had a solid May. June was a little bit depressed going up against the strongest month last year. but then July was very strong. So we felt very good or we feel very good about the momentum coming out of the quarter. From a category perspective, cosmetics was very strong. It was nice to see the Ladies business comping nicely positive and better than the chain average. That's gotten a lot of attention over the last few years. So kind of kudos to that merchandising team, whether it's gotten that business up to the comps that they're achieving now.

And with that, I'll turn it over to Adam for the [indiscernible] of this question.

Yes, Matt, on the second half, so let me take tariff costs first. So I talked about the 90 basis point impact on operating margin in Q2. That was primarily in 2 components of cost of goods sold. The impact on product cost was the primary driver. And the other is DC processing costs as we had less merchandise pre-ticketed by our vendors, which impacted our profitability. So do expect tariff pressure on merchandise margin, the balance of the year, but expected to be slightly lower than what we experienced in Q2. The remaining improvement quarter-by-quarter in tariff cost is primarily in distribution as we expect to revert back closer to those historical pre-ticketing levels. Other moving parts in the back half I mentioned in the call commentary packaway just based on how we see the flow of goods in the back half. That will put pressure on our Q3 earnings and then to recoup that in fourth quarter based on how we see year-end inventory. The other big moving part is, I mentioned the new distribution center as we ramp up the production in that facility, it will put pressure on that portion of DC costs for the balance of the year.

I want to circle back -- there was a piece of your question I didn't address, which was the 2 to 3 comp guide. As we put in the press release, we are looking at the balance of the year with some cautious optimism. And so we've embedded a little bit of that into the 2% to 3% guide. If you wanted to play it a bullish case, we are going up against a softer quarter.

Last year in Q3 than Q2. But there's a lot in on in the macro environment. So we want to embed some conservatism.

And the next question comes from the line of Lorraine Hutchinson with Bank of America.

It sounds like your appetite for raising prices has increased as you see, I think it's going up throughout the industry. How is the customer responding? And do you expect prices to fully offset the tariff pressures by next year?

So I wouldn't read too much into our -- we've had a very, very modest change in prices. The low, low single-digit change in -- we're going to be very cautious about our changes in AUR going forward. The Ross brand depends on being the best bargains in the market -- and we'll -- we're going to be looking at our direct competitors and sort of the broader retail landscape to see movement before we make any significant changes in [indiscernible]

On the last part of your question, I do think that going into next year, there'll be just a new equilibrium of prices. And as you'll note in this particular year, the tariff-related impact will get smaller between 2 and 3 in Q3 and Q4. And we'd like to come out next year, and we're certainly not going to guide on this call and not be spiking out tariffs separately. But I think by then, there'll be just another set of retail price delirium and we'll find our place with an umbrella underneath for everybody else's price.

And the next question comes from the line of Michael Binetti with Evercore ISI.

Congrats on the improvement in the quarter. maybe just help me think through a couple of the guidance components. The original guidance you gave us for the year, the high end was $655 million, good performance against what you were planning in the first half year. But then we had $0.22 to $0.25 of tariffs. We thought maybe $630 to $633 versus the new guidance at $621 at the high end. Is there anything you can point me to beyond tariffs that you guys embedded in this year? And then can you -- I guess, Jim, can you just -- can we hear a little bit about some of the initiatives that you spoke to early on here? You outlined signage, marketing, store operations, line any positive proof points you can point to so far in the stores that have received the majority of those initiatives?

Michael, I'll start with some of the initiatives. [indiscernible] some of the things we spoke about. First was the store refreshes where we expect to get through about half of our stores this year. And as a reminder, -- what we're doing in the existing stores is changing up the signage, which includes new perimeter and way-finding signage along with addressing cosmetic-type repairs in the stores. We expect to get through half of the stores this year for the stores we completed. We think the stores look great, and then we expect to complete the chain in 2026. I think you also know we've been piloting self-checkout. We have that in about 80 stores today, and that's been very successful for us. We've been able to -- the customer has really enjoyed the experience. It's allowed us to reduce line lengths, and we've been able to control the shortage. So we're planning to expand to a number of stores next year, mainly in our high-volume stores that will help us improve customer throughput.

And Michael, this is Adam. If your question was back to how we guided at the beginning of the year. Obviously, the biggest driver is the tariff impact, right, which we're now kind of pegging at $0.22 to $0.25 for the year. And then secondarily, have a little bit more conservative sales assumption for the full year than we did back in March based on first quarter.

Could I follow that by just asking the SG&A dollar budget for the year, where it's at today versus what you initially set it at coming into the year in March. Any change there would be noted?

I think we're pretty consistent we have [indiscernible]

No significant changes in SG&A. And Michael, we never got to your question around initiatives, store environment, marketing Michael Hartshorn address the store signage fees, which is a very nice upgrade to contemporizing the store look and feel -- we are looking at a lot of things in terms of the store labor model. Given the fact that we have more than 2,000 stores and it's a very complicated equation -- we have deployed a number of tests that are out there right now, tweaking different things to see if we can get more throughput and try to drive sales by putting more labor into some stores. So it's much too early to comment on the results of that. From a marketing standpoint, we have launched a new campaign in both brands. So at Ross, it's a campaign called [indiscernible] there's 4 just terrific spots that the team has put together. They harking back to brands at a great value, but maybe it's a bit more of an emotional connection for a customer. And then DD's has its own campaign called Ross [indiscernible] dd's that's entirely a digital campaign. So you have to be on one of the meta-platforms or on TikTok to see it. But a very full and energetic campaign for dd's as well. So it's very early days, but I'm really pleased to see the organization respond so quickly and come up with some what I believe to be some really nice changes early on.

And the next question comes from the line of Paul Lejuez with Citigroup.

Curious if you could talk a little bit more about your transactions versus ticket, how that changed during the quarter when you reference acceleration in curious what those metrics were the bigger driver. Any color you can give there? And just also how you're thinking about transactions versus to get in the back half? And then second, [indiscernible] I'm sure you guys had an availability of merchant in terms of like what merchandise would look like, availability of merchandise. Would look like before the quarter coming into the quarter, you curious what you're seeing relative to your expectations? Any surprises within certain categories do you anticipate having any holds any assortment trial there?

Paul, it's Michael Hartshorn. You're breaking up a bit, but I think your question was the composition of the comp in terms of transactions and what we saw during the quarter. As we said in the commentary, the 2 comp was driven by a slight increase in traffic and also an average increase in the average basket. The basket itself was driven by both slight increases in AUR and units per transaction. If you looked at that where we were very strong in May, dipped in June and then strong again in July, across the quarter, it was driven by a mix of traffic and also a higher basket. In terms of availability, we feel very good about the availability of closeouts. In the second quarter, one of the things we called out in the script was that was one of the things that helped us get to the low end of the range of the tariff impact by leaning in more into close out so I'd say availability is super strong.

And the next question comes from the line of Alex Straton with Morgan Stanley.

Congrats on a nice quarter. Maybe just looking at profitability, I know that the second quarter makes for the second 1 where you're lapping that branded strategy from last year. So is higher branded mix of permanent margin have into the business? Or do you see scope for it to eventually drive total profitability higher, which I think was the initial intent? And maybe bigger picture, can this business return to kind of low-teens margin over time? Or does that branded mix being higher, keep you from getting there?

Alex, our initial idea with the branded strategy is that early on, it would be a margin hit, but we'd be able to build on that over time. as we sharpened our expertise, built better vendor relationships, had access to branded closeout. And our thoughts on that have not changed. So we believe we can build on it over time.

And the next question comes from the line of Brook Roach with Goldman Sachs.

Are you seeing any increased signs of consumer trade-down activity or changes in the demographic mix of consumers in your store either by income or race as prices have increased across the ecosystem this holiday season?

Look, on trade down, we didn't see a change in income cohorts. It was pretty broad-based in the quarter. From a ethnic standpoint, as we've said in the past, we do serve a broad customer base, but our Hispanic customers are very important to us. They go higher than the U.S. Census. During the quarter, stores that had a high concentration of the Hispanic population underperformed the chain. That was especially true in June and especially in Southern California. The good news is we did see a bounce back in sea.

And the next question comes from the line of Mark Altschwager with Baird.

On the tariff mitigation front, I wanted to deal [indiscernible] Just any update on the actions you're taking that are working here as we think about better buying, category flexibility, price what's moving the needle to offset the pressure on merchandise margin? And what are the factors that could potentially drive greater-than-expected mitigation in the back half of the year? Sure. Well, the merchandising team has just been working tirelessly to mitigate the impact. If you were to take the tariff rates that are out there and just do simple back down below math and just flow it through unmitigated, of course, the impact would be much greater than what we've seen. So that's thanks to just a tremendous amount of hard work in shifting by negotiating with vendors, very little increase in AUR. So that really hasn't been a factor. But also increasing the amount of closeout merchandise versus upfront than we initially had planned. So as we roll forward, as I said earlier, I do think we'll wind up with franking equilibrium. We have no intentions of being the first ones to go out with higher prices. So we'll be watching sort of the rest of the retail industry. And as soon as that equilibrium starts to take effect, we'll have some room to kind of grow into any inflated costs that we need to access.

The other change that Adam had mentioned is at the very beginning, when China was at 145%, we stopped vendor pretending to give us stuff flexibility if we chose to change prices once the goods came into the country. We expect -- we did have an impact in Q2. We had a lesser impact in Q3, and we expect that to completely wane in the back half of the year as we return to our historic levels of vendor ticketing.

And the next question comes from the line of Chuck Grom with Gordon Haskett.

This is Ryan Bulger on for Chuck here. I wanted to ask a related question. on the restored guide, obviously, you have a lot more confidence now and what the business is going to look like for the second half of the year as compared to 1Q. And I was just wondering if you could unpack how much of that is more stability in the environment versus things you've learned as you've undertaken these efforts over the past few months.

Sure, Ryan. It's actually pretty simple. At the time, we had just come off the 145, and we hadn't purchased a significant majority of our merchandise for the back half of the year. So now that we're Q3 substantially bought, we had the majority bought more than the majority bought in Q4. We have a good read on our fall purchasing. At the same time, although it still changes quite often and it's dynamic on the tariff front, it's more stable than it was at the beginning of May.

Great. And then one other thing I wanted to ask, have you seen anything different on customer cohort trends by age? Are you mixing any younger, you seeing any more millennials or Gen Z customers.

And the next question comes from the line of Irwin Boruchow with Wells Fargo.

Adam, just a little bit more on the third quarter, trying to make sure I understand. So the margin degradation relative to 2Q is decently greater but the revenue is pretty similar, 2% to 3% comp. The tariff headwind is a little bit less I guess I'm just trying to make sure I understand what's the driving factor. If you can maybe just give us what the gross margin plan is for third quarter? Just trying to understand the moving pieces.

Yes. The biggest piece is the packaway impact. We're in second quarter on a year-over-year basis was pretty flat in Q3 based on how we see that inventory flowing. It will be a significant headwind in Q2 -- in Q3. And again, would expect that to revert in Q4.

And the next question comes from the line of Adrienne Yih with Barclays.

And nice to see the progress. My first question is the comment on pricing, you're starting to see it come through. And what type -- I know for you, you're at the low, low single-digit range. But across kind of frontline retail, how are you seeing kind of those prices come up? And are there categories, say, apparel or footwear, where you're seeing it more so. And the clarification on the tariff impact. Is this just the portion that is direct to you? Or does it also encompass things that you're seeing from your upfront buys getting passed along to you?

On your last question, it's across the merchandise categories. We had a small percentage we have direct impact because we're paying the tariff, but we -- the vendors we are seeing cost increases outside our direct imports. So it's across the universe of merchandise categories.

Okay. Then in terms of where we're seeing some inflation, if you go to some of the sort of more mainstream retailers, you can see some of their prices are going up in terms of apparel or home -- probably the center of the bull's eye are products made with metals. That's been one of the most obvious places where we've seen prices go up. And that falls, of course, into the home category. So we have a very experienced team of merchants that are just constantly comp shopping. And we're going to ensure that we have the best bargains in the store. And at some point over time, this pressure that we're facing today will abate.

Okay. And then just a final clarification. We're hearing from -- there's this grace period that if you shipped out before, I think it was August 9th or 7th and then you arrived here before October 5th. It's still on the prior tariffs. So it would seem that a lot of the retail inventory for holiday will be under that prior tariff and that we've been told by some brands that they will be raising prices again in spring of next year under the second wave of tariffs. Do you believe that the tariff is kind of isolated or you will have had enough mitigation strategies put in place that you'll be able to offset this kind of next kind of kick it down the road into -- or do you even think that, that's actually happening into spring?

No. I think it will happen, to your point, some of the India tariffs, especially at the 25 goes to 50. No, I think that you'll see this go into next year, and I think we would expect to see price increases. And -- but over time, as Jim mentioned it, we think it will reach equilibrium, and it will be business as usual.

The next question comes from the line of Dana Telsey with the Telsey Advisory Group.

And nice to see the progress. Jim, we heard about cosmetics continuing to be the best-performing category. Can you expand on apparel and what you've been seeing there with the initiatives that you've put in place and also on home. And then secondly, with the new store openings, what are you seeing in cost to open leasing costs and productivity of new stores as they're opening?

Sure. I'll take the merchandising pieces of it, [indiscernible] can take the new stores peaks.

I think we're pretty encouraged. The business has just improved between Q1 and Q2 and across the board, the exit velocity, so to speak, in July was very strong across nearly every major merchandise department within apparel, the ladies business, which is the kind of the driver of the branded strategy, not the only piece of the branded strategy, but the driver was really to get the Lee's business righted. And it's just been great to see that part of the business comping more positively than the chain. And then beneath Ladies, if you went sort of category by category, which being once again broad-based strength and broad-based improvement within each of the sort of subclassifications there. or at least most of them. So that's been great. From a home perspective, home has been a little bit more complicated. It was comp eroding in the quarter. It eke out a positive comp at the end of the quarter. I think part of that was we had probably a little bit of a footfall in getting our product inbound when tariffs first came out, we had a little bit of a receipt hole, if you will, towards -- as we got through the June period. We've shuffled that organization a little bit -- we feel really good about the team that's in place there now. And I'm optimistic about the future of the home business for us. It's still very early days, but it's nice to see that business turned slightly positive in July.

On real estate. So we feel good about the real estate landscape, Dana, and have a healthy pipeline. As you know, there's not a high volume of any new development, and we've been able to take advantage of store closures from bankruptcy filings or other retailers downsizing their fleets during the quarter, we did acquire a number of stores in the right aid bankruptcy deal mostly in our core West Coast markets. That strengthens our existing pipeline, especially for 2026 and also helped in reaccelerating DD's growth for us. In terms of new store openings, we noted a couple of these in our comments, but that we entered Puerto Rico in the quarter with 3 stores in July. And the initial response has, I would say, far exceeded our expectations. It's still early, but based on this, we're optimistic this will be a strong market for us. We also had a number of New York Metro stores that we opened, again, very good customer response. And so based on this, thus far, we're optimistic about expanding in the Northeast.

And the next question comes from the line of Aneesha Sherman with Bernstein Research.

I'm curious about your comments around pricing, Jim. Last quarter, you said you were planning to maintain the price umbrella versus full price retail. It sounds like you're now saying you're being a little bit more cautious, very low single-digit increases and perhaps broadening the gap versus full price retail. And I think you said you will grow into those price points over time. Can you talk about what may have changed? Are you seeing a consumer response that's maybe making you a little bit more cautious than perhaps a few months ago? And then a quick follow-up on the Ladies business. You talked about ladies comping better than chain average. It's a real clear acceleration there. Can you talk about what's driving that? Do you attribute that to the better brand strategy paying off? Or is it around availability of closeout or anything in particular that's driving that outperformance versus what we've seen in the last few quarters?

Sure. I don't think we're being particularly more cautious. I think we'll continue to maintain the price umbrella against mainstream retail. And we're just hyper conscious of what's going on in the broader retail landscape now. What we're taking somewhat of a a longer-term view that we want to impress a customer that comes in looking to buy something and have them feel like we're still delivering the bargains that they've become accustomed to. And as we see prices start to move, we'll start to move as well. Of course, there's always a lag for competitors and for us based on product that's come in pre-ticketed. We're not going to go throughout the chain in store and reticket things. So it will be on the next set of receipts anyway. On the ladies acceleration, again, I'd come back to giving credit to the team. The buying offices have really been fed fast in executing against the brand strategy. They've leaned into young contemporary, a bit more. We've seen a nice impact in our juniors business. the -- ladies business kind of across the board has been strong. The denim business has been strong. So we've seen a lot of strength in ladies.

And the next question comes from the line of John Kernan with TD Cowen.

Congrats on the momentum into -- or through back us going into fall. Just on the expenses in COGS related to the distribution centers also the CapEx dollars, which are being -- a lot of which I think are being dedicated to dd's, what are the near and long-term returns on this? How can this lift the overall margin profile of the business long term?

Well, what typically happens with the DCs is it's it's a capacity play. So as sales grow, you need the excess capacity and then what happens when you open it up, you are able to leverage the volume in that DC and you should get leverage over time. Right now, the DC that we opened is in Arizona, DC Capital that we're devoting this year, it's about a little over 28% of our total capital. We are building our next DC, but it's 3 years, 2.5 years away, 2 to 3 years away would be the next openings. So over the next 2 years, we expect the leverage on DC.

Understood. And then Jim, maybe a quick follow-up for you. ex tariffs the business at a 2% to 3% comp, we've seen about mid-single-digit earnings growth based on the new full year guidance. With Bill stepping into the CFO seat pretty soon, what do you see as like a long-term earnings algorithm -- where is the opportunity on the margin profile of the business?

Well, I'll answer that for you. So the long-term algorithm is about 5% new store growth to get. Our new stores are in the 60% range. So that drives 2% of the EPS growth. If you comp at 3%, that gets you 3% EPS growth, that gets you to 5%. There's EBIT upside in that 1% to 3%, and then you have your stock buyback at 2% to 3%, and that gets you to right around double-digit EPS growth on the 3x.

And the next question comes from the line of Corey Tarlowe with Jefferies.

Great. I had a bigger picture question for Jim and then just a follow-up. On the big picture question on growth, as you come into the business and you've assessed sort of where Ross is at and where the competition is in terms of growth and you think about the scalability of Ross from a unit perspective what are some key attributes that stand out to you? And where do you think kind of longer term and what the advantage could be of kind of accelerating -- potentially accelerating unit growth, could that be a possibility? And how do you think about the ability of the business to potentially do something like that if it even was feasible.

Sure. Great question, Corey. I guess a couple of things. I was fortunate enough to be recruited into a company that was already extremely well run and already growing. So I have a good fortune of spending the first 6 months and intend to spend the balance of this year really learning about the business. That said, and answering your question maybe a little bit more specifically, the -- there's a tremendous amount of organizational muscle here. And we've been adding 90-ish stores. I think that's the plan for this year. We're certainly not going to guide future years, but you know me well. I do think there's an opportunity for us to accelerate. And I certainly don't think we have any capability shortfall. I think we have the resources to do that. We would have to grow the supply chain capability at the same time we grow the store footprint. But we have capability to do that as well. And we also have -- we've been experiencing some really nice openings in our existing markets. But what Michael covered is very encouraging, right? We've been opening up stores in brand-new market sizes that are well established to our competitors and seeing some really nice returns. So if I'm just thinking about what our white space opportunities just for unit growth and unit acceleration, I think it's pretty optimistic.

That's great. And then just as a follow-up on the renovation plan, can you just remind us what the comp lift is and what some of the benefits are that you're seeing from the initiative?

We haven't disclosed it's still early innings. We're doing the first half of the stores this year, so we'll finish up the first half. and then complete the chain next year. Customer response has been good. It's too early to measure the sales.

And our final question comes from the line of Marni Shapiro with The Retail Tracker.

Congrats on all the improvement. I had 2 quick questions. One, I just want to clarify on the AUR conversation from earlier. Could the AUR is up very minimally low single digits, I believe you said [indiscernible]

And mix-related mining versus [indiscernible]

So as we get into the back half of the year, and we've all heard this from retailers, I've heard it from so many friends where suppliers' prices are going up. will you move up in line with the industry? So could we -- should we expect to see in the back half of the year, AUR increases. And I guess, the kind of adjacent question is, how does your packaway strategy impact that? Because could you have had some really great holiday items packed away from last year that could kind of mitigate some of this as well?

Marni, on how we move into it, I think we used the word cautious, but we won't be the first to raise retails if retails go up, it will certainly give us flexibility to follow. In some places, we'll move along and raise prices, test it, see how the customer impacts. In other places, we may give more value. So it really is area-by-area decision by the merchant. But if prices go up, it gives us the flexibility to follow for sure.

Right. And then just one following question. Are you seeing a reversal or less pressure on wages at the stores in the DCs? I know retail has a lot of turnover, but I'm also wondering if you're finding less turnover as more broadly, people are staying in their jobs and kind of it shifted from the worker to the employer in general out there. Curious what you guys are seeing?

Yes. The workforce has been -- it's nothing new, but the workforce has been stable for the last couple of years. So I don't think anything has changed. We've had -- with all the ticketing efforts, for instance, related to the tariffs, we had no problem filling jobs to be able to do that. So I think the overall environment is fairly stable.

And fairly favorable, I'm assuming, for you guys.

I would say stable. It hasn't changed a lot for us.

The number has been stable for a while.

There are no further questions at this time. I'd now like to turn the floor back over to Jim Conroy for any closing remarks.

Thank you, everyone, for joining us on the call today, and we look forward to speaking with you on our next earnings call. Take care.

And thank you, everyone. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.