Ross Stores (ROST) Q2 FY2026: Comps +10%, EPS +71% on Tariff Refund
Ross Stores posted a 17.6% operating margin in the quarter ended August 1, 2026, up from 11.5% a year earlier — and about two-thirds of that jump will not repeat. A $253 million refund of tariffs collected under the International Emergency Economic Powers Act (IEEPA), booked entirely inside cost of goods sold, supplied 405 basis points (4.05 percentage points) of the gain after the U.S. Supreme Court ruled in February 2026 that the levies were not authorized. Strip the refund out and the operating margin was 13.6%, which is still higher than any full year the off-price chain has delivered since fiscal 2022. The more durable number is the 10% comparable store sales increase, seven points of which came from customer traffic rather than a bigger average basket.
A note on labels: the company calls the year ending January 30, 2027 "fiscal 2026." All figures below follow that convention. Prior-year comparisons are the quarter and half-year ended August 2, 2025.
1. Balance Sheet
1-1. Assets
| Item | Aug 2, 2025 ($M) | Aug 1, 2026 ($M) | Change % |
|---|---|---|---|
| Cash and cash equivalents | 3,847.0 | 4,288.1 | +11.5% |
| Accounts receivable | 210.5 | 248.1 | +17.9% |
| Merchandise inventory | 2,608.5 | 3,087.4 | +18.4% |
| Property and equipment, net | 3,906.3 | 4,257.8 | +9.0% |
| Operating lease assets | 3,374.6 | 3,545.4 | +5.1% |
| Total assets | 14,495.5 | 15,982.3 | +10.3% |
The one line that deserves scrutiny is inventory. It grew 18.4% against quarterly sales growth of 13.3%, and the store base expanded only 4.3% (2,328 versus 2,233 locations). Inventory per store rose 13.5%, to $1.33 million.
Look inside that number and the gap widens. Packaway merchandise — goods bought opportunistically and warehoused for later release — fell to 36% of inventory from 38%. That means the non-packaway portion, the stock actually flowing to shelves, rose 22.2%, or 17.2% per store. Against a 10% comp, that is a forward bet on demand holding. Days of inventory on hand, measured against first-half cost of goods sold, stretched to 67 days from 63 (65 days if the tariff refund is added back to cost of goods sold). Ross is not carrying stale goods, but it has moved from lean to stocked.
Property and equipment rose 9.0% as the store opening pace accelerated. Operating lease assets of $3,545.4 million and matching lease liabilities sit on the balance sheet under ASC 842; the balance was up 5.1% and is a straightforward function of store count.
Inside equity, retained earnings climbed 22.4% to $5,316.4 million. Treasury stock deepened to negative $935.9 million from negative $783.8 million, which reflects shares withheld for employee tax obligations rather than the main buyback — repurchased shares are retired against retained earnings and paid-in capital. Other comprehensive income was zero in both periods, so nothing is hiding below the net earnings line.
1-2. Debt Structure
Financial debt fell 32.8%, to $1,018.5 million from $1,516.3 million, after the company repaid $500 million of 0.875% notes at maturity in April 2026. Only $241.5 million matures inside three years (the 4.700% notes due 2027), or 23.7% of the total. The weighted average coupon across the four remaining series is roughly 3.4%, and the longest maturity runs to 2050. There is no refinancing wall and no floating-rate exposure — the $1.3 billion revolving credit facility was completely undrawn, with no letters of credit outstanding.
With $4,288.1 million of cash against $1,018.5 million of debt, Ross holds a net cash position of about $3.27 billion. Cash interest paid in the half fell 44.8%, to $19.8 million.
Operating liabilities tell the working-capital story. Accounts payable rose 18.9%, to $2,621.7 million, essentially tracking the inventory build — payables equalled 85% of inventory in both years, so suppliers are funding the extra stock rather than shareholders. Accrued payroll and benefits jumped 39.6%, to $440.8 million, which is incentive compensation accruing against a strong year.
1-3. Capital Structure
Total equity reached $6,743.2 million, up 17.6%, lifting the equity-to-assets ratio to 42.2% from 39.5%. The composition is telling: additional paid-in capital of $2,359.5 million against retained earnings of $5,316.4 million. This is a business capitalised almost entirely out of its own retained profits, not shareholder injections. Annualising first-half net earnings against average equity implies a return on equity near 46%.
2. Income Statement
2-1. Headline Results
| Item | Q2 FY2025 ($M) | Q2 FY2026 ($M) | Change % |
|---|---|---|---|
| Sales | 5,529.2 | 6,264.9 | +13.3% |
| Cost of goods sold | 4,002.2 | 4,145.2 | +3.6% |
| Selling, general and administrative | 888.7 | 1,016.1 | +14.3% |
| Operating income | 638.3 | 1,103.6 | +72.9% |
| Operating margin (%) | 11.5% | 17.6% | — |
| Net earnings | 508.0 | 851.3 | +67.6% |
| Net margin (%) | 9.2% | 13.6% | — |
| Diluted EPS ($) | 1.56 | 2.66 | +70.5% |
Sales grew $736 million. Comparable store sales contributed $534 million and new stores $202 million. The composition of the comp matters: traffic rose about 7% and basket about 3%. Growth driven by more transactions, not higher prices, is the harder kind to manufacture and the kind that tends to persist longer.
The profit line needs unpacking. Management disclosed the arithmetic: cost of goods sold fell 625 basis points (6.25 percentage points) as a share of sales, of which 405 points came from the tariff refund. Merchandise margin added 110 points, distribution costs 100 points, and occupancy leverage 25 points, partly offset by freight and buying costs. Excluding the $253 million refund, operating income was $850.6 million — up 33.3% on a margin of 13.6%, a gain of roughly 203 basis points.
The comparison should be cleaned on both sides. The prior-year quarter carried an $0.11 per share drag from tariff-related costs, which works out to roughly $47 million pre-tax, or 0.85 percentage points of that quarter's sales. Normalising both periods puts operating margin at 13.6% versus 12.4% — an underlying expansion of about 118 basis points, against the roughly 610 points the headline shows.
That reframes operating leverage, the rate at which profit responds to each unit of sales growth. As reported, operating income grew 5.5 times faster than sales. Excluding this year's refund, 2.5 times. Excluding one-time tariff items from both years, about 1.8 times. The last figure is the honest one.
The same discipline applies to earnings per share. Of the $1.10 increase, the refund accounts for $0.60 and the absence of last year's tariff drag another $0.11 — together 65% of the gain. A 1.6% reduction in diluted shares (319.5 million versus 324.8 million) added roughly $0.04. Underlying EPS was about $2.06 against $1.67, up 23.4%. For the half, underlying EPS of $4.09 versus $3.14 implies 30.3% growth, against a reported 54.8%.
2-2. Cost Behaviour
The segment disclosure separates the cost base, and it shows where leverage actually came from.
| Q2 expense line | Q2 FY2025 (% of sales) | Q2 FY2026 (% of sales) | Change |
|---|---|---|---|
| Cost of goods sold, excluding occupancy | 66.4% | 60.4% | −598bp |
| Occupancy (rent, store depreciation) | 6.0% | 5.8% | −24bp |
| Store-related (payroll, advertising) | 13.6% | 13.6% | +1bp |
| Other general and administrative | 2.5% | 2.6% | +14bp |
Only occupancy — the genuinely fixed line — leveraged, and only by 25 basis points. Store-related costs held flat at 13.6% of sales, confirming that store payroll and advertising scale with volume rather than sitting still. General and administrative costs rose 19.7% in dollars on higher incentive compensation. Adding the refund back, merchandise-related costs still improved 194 basis points, so the underlying gain is a buying-and-distribution story, not a fixed-cost-absorption story.
Multi-year context guards against reading one quarter as a new baseline. Annual operating margin ran 10.6%, 11.3%, 12.2% and 11.9% across the four fiscal years through January 2026, on revenue compounding at 6.8% a year. First-half margin excluding the refund, at 13.5%, sits above every one of those years. The 13% first-half comp compares with 1% a year earlier. This is a genuine step-change in trading, and it is running well ahead of the company's own three-year trend.
3. Cash Flow (Six Months)
| Item | H1 FY2025 ($M) | H1 FY2026 ($M) | Change |
|---|---|---|---|
| Operating cash flow | 1,078.1 | 1,711.8 | +58.8% |
| Investing cash flow | (409.1) | (460.2) | +12.5% |
| Financing cash flow | (1,552.1) | (1,556.6) | +0.3% |
| Ending cash (incl. restricted) | 3,913.3 | 4,356.9 | +11.3% |
Free cash flow — operating cash flow less capital expenditure — reached $1,251.6 million, up 87.1%, for a 10.2% margin on sales versus 6.4%. The tariff refund was substantially all collected in cash by the quarter end, so it flatters this figure too; excluding it, operating cash flow still rose 35.3% and free cash flow 49.3%.
Earnings quality holds up. Operating cash flow covered net earnings 1.14 times, against 1.09 times a year earlier, and both sit above the 1.0 threshold that separates cash-backed profit from accounting profit. The inventory build consumed $456.4 million of cash, nearly triple the prior year's $164.0 million, but payables released $226.3 million to offset it. Depreciation was $272.8 million and stock-based compensation $106.4 million — the latter equal to 0.87% of sales, up from 0.79%, driven by performance share awards nearly doubling to $54.1 million.
Capital expenditure of $460.2 million was 3.75% of sales, slightly below last year's 3.89% despite a faster build programme. Management guided to roughly $1.1 billion for the full year, covering new stores, the next distribution centres, and IT systems. This is growth spending, not maintenance: depreciation of $272.8 million in the half annualises well below the capital budget.
Financing outflows of $1,556.6 million consisted principally of $637.5 million of buybacks, $286.2 million of dividends, $136.6 million of shares withheld for taxes, and $500 million of debt repayment. Shareholder returns of $923.7 million absorbed 74% of free cash flow, down from 118% a year earlier when cash reserves were funding the gap.
4. What Else Matters
The refund is cash in hand, but the tariff question is not settled. The filing states the amounts were substantially all received, so reversal risk on this $253 million is low. What it does not resolve is the forward cost structure. The company lists tariff increases and trade-policy uncertainty among its principal risks, and part of the underlying margin gain — the 100 basis point improvement in distribution costs — is itself partly a base effect from tariff-related processing costs incurred in the prior-year quarter. Investors sizing a run-rate margin should assume neither the refund nor an indefinite absence of tariff friction.
Store growth is being accelerated into the strength. Ross opened 47 stores in the quarter (35 Ross, 12 dd's DISCOUNTS) against 31 a year earlier, and raised the full-year plan to about 115 openings, comprising roughly 90 Ross and 25 dd's. A further 51 are planned for the third quarter. The chain now operates 2,328 locations: 1,952 Ross across 44 states plus Guam and Puerto Rico, and 376 dd's. Non-comp sales already added $202 million in the quarter.
Everything is physical. The filing describes both brands as off-price retailing "in stores," and discloses no e-commerce channel or online sales share. Growth therefore depends entirely on comps and square footage, which is unusual among large US retailers and concentrates execution risk in real estate and distribution capacity — hence the new distribution centres in the capital plan.
Incentive compensation is the shock absorber. SG&A rose 15 basis points as a share of sales on higher incentive pay, accrued payroll is up 39.6%, and performance awards nearly doubled. This is a cost that flexes down if comps decelerate, which makes it a cushion rather than a structural burden. But it does mean reported margin will not fall as far as sales in a downturn, nor rise as fast in a further upturn.
Merchandise mix barely moved. Home Accents and Bed and Bath rose to 24% of sales from 23%, Men's slipped to 16% from 17%, and every other category held. A 10% comp with essentially static mix points to broad-based demand rather than one hot category.
Contingencies are disclosed but unquantified. Class and representative actions alleging wage-and-hour violations, primarily in California, remained pending at quarter end. Management states resolution will not have a material adverse effect and discloses no estimated range of reasonably possible loss. Reserves for unrecognised tax benefits stood at $68.0 million, of which $54.2 million would affect the effective tax rate if recognised. The effective tax rate was 25.0% for the quarter and 23.9% for the half.
5. Takeaways and Outlook
What grew. Traffic. Seven of the ten points of comparable store sales growth came from more transactions, and the half-year figure of 13% compares with 1% a year earlier. Underlying operating margin, cleaned of tariff noise on both sides, expanded about 118 basis points to 13.6% — above any full year in the company's recent record. Underlying EPS rose 23.4% in the quarter and 30.3% in the half. Free cash flow, even excluding the refund, grew 49.3%.
What the risks are. The headline is inflated: 65% of the EPS increase came from tariff items that will not repeat, and the third and fourth quarters lose that support. Inventory is the operational watch item — non-packaway stock per store is up 17.2% against a 10% comp, and days on hand have stretched by four. If traffic decelerates, that becomes markdown pressure on the 110 basis point merchandise margin gain. The cost base offers little structural leverage: only occupancy, at 25 basis points, actually levered, so future margin has to come from buying and distribution rather than volume absorption.
Capital allocation. The order of priority is legible from the cash flow statement. Growth capital comes first — roughly $1.1 billion planned for the year against $460.2 million spent, funding 115 new stores and new distribution capacity. Shareholder returns come second and are rising but restrained: the dividend went to $0.4450 a quarter from $0.4050, up 9.9%, and $637.5 million of stock was repurchased at an average of about $220 a share under a new two-year, $2.55 billion authorisation with $1.9 billion remaining. Deleveraging comes third and is nearly complete: $500 million repaid at maturity leaves $1.02 billion of debt against $4.29 billion of cash. Combined returns took 74% of free cash flow, leaving the balance sheet with $3.27 billion of net cash and an undrawn $1.3 billion facility. The company has the capacity to fund a faster store programme and higher returns simultaneously, which is the practical meaning of a raised opening plan alongside a bigger buyback.
Position in the cycle. Off-price retail is not a classic capital-goods cycle, but it is sensitive to where the consumer sits. A 7% traffic gain across 2,328 stores, with mix essentially unchanged, is consistent with customers trading down into value formats. That is a tailwind while it lasts and a headwind if it reverses, because the same trade-down that fills Ross stores tends to unwind when discretionary budgets recover. The next two quarters will test it without the tariff refund to cushion the comparison.
Notes Quick Check
Accounting policy — One reportable segment; Ross and dd's DISCOUNTS are two operating segments aggregated on similar economics. Significant estimates include inventory valuation reserves and packaway carrying costs. Segment detail — Revenue is disclosed by merchandise category only, with no geographic or channel split; there is no reconciling gap between segment and consolidated operating income. Debt — Four series of senior notes totalling $1,018.5 million at a weighted average coupon near 3.4%, with $241.5 million due 2027 and nothing else before 2030. Contingencies — California wage-and-hour class actions pending, no loss range quantified; unrecognised tax benefits of $68.0 million. Compensation — Stock-based compensation of $106.4 million in the half, with performance awards rising to $54.1 million from $27.5 million, tied to fiscal-year performance goals and vesting over about three years; $228.3 million remains unamortised over a weighted average 1.8 years.
This analysis is based on filings submitted to the U.S. Securities and Exchange Commission and is provided for informational purposes only. It is not investment advice. Source: SEC Form 10-Q, filed September 1, 2026. Multi-year annual figures are drawn from the company's Form 10-K filings via SEC XBRL company facts.
