Ross Stores: Buy The Dip Despite Tariff Impact

Ross Stores (ROST) reported flat same-store sales growth for Q1 FY25 and issued weak Q2 guidance, citing weak consumer confidence, high interest rates, and potential tariff impacts, particularly on products sourced from China. Management expects tariffs to negatively impact Q2 EPS by $0.11-$0.16 and reduce operating margin by 90-120bps. Despite near-term headwinds, including underperformance relative to competitor TJX, an analyst initiated a 'Buy' rating with a fair value of $160, based on Ross Stores' historical capital allocation policy and anticipated recovery in same-store sales growth from FY26.

Analysis

Ross Stores (ROST) reported flat same-store sales (SSS) growth in Q1 FY25 and issued weak guidance for Q2, projecting 0%-3% SSS growth. Management highlighted that tariffs are expected to create an $0.11 to $0.16 headwind to Q2 earnings per share and reduce operating margins by 90-120 basis points, a significant concern as half of its products originate from China. This near-term outlook is clouded by weak consumer confidence and high interest rates, impacting discretionary purchases, particularly in home-related merchandise which constitutes 26% of revenue. Despite these challenges, and an apparent lag in supply chain and cost initiative effectiveness compared to competitor TJX Companies (TJX) which maintained its guidance despite tariff impacts, an analyst has initiated coverage with a 'Buy' rating and a $160 fair value per share. This positive long-term view is supported by Ross Stores' historical SSS growth of 3%-5%, its robust capital allocation strategy (having returned nearly all of its $4.4 billion free cash flow generated over the past three years via $1.37 billion in dividends and almost $3 billion in share repurchases), and plans to open 90 new stores in the current year, contributing an estimated 2.5% to topline growth. The analyst forecasts a 3% SSS growth in FY25, with SSS expected to recover to 5% from FY26 onwards as macroeconomic conditions potentially normalize, leading to a total revenue growth forecast of 7.5%. Key risks include high competition in the off-price retail market, pending litigations related to wage and hour laws, and the substantial threat of tariffs eroding its low-cost sourcing advantage.

Key Decisions for Investors

• Investors should weigh the analyst's long-term 'Buy' rating and $160 price target against the immediate headwinds of flat Q1 SSS, weak Q2 guidance, and significant tariff impacts which have led to market disappointment.
• Close monitoring of developments regarding US-China tariffs and Ross Stores' strategic responses to mitigate these cost pressures is crucial, particularly in comparison to nimbler competitors like TJX.
• Consider the company's attractive capital return policy and potential for sales and margin recovery from FY26, but balance this against the identified risks of intense competition, unresolved litigation, and sustained tariff pressures before adjusting positions.