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Business slowed for off-price retailer Ross Stores (ROST) in 3Q25, but that didn't stop the company from posting its tenth consecutive EPS beat on a combination of lower costs and share buybacks. The better-than-expected earnings allowed ROST to lift its FY25 EPS guidance higher, providing a boost to a stock that's drifted lower by 7% since it last reported earnings in late August. Still, the company's quarterly results and mixed Q4 outlook reflect a challenging environment for ROST as its low-to-moderate income customers continue to cut back on discretionary spending.

• Comparable store sales grew by just 1%, falling short of ROST's guidance of growth 2-3% and marking a deceleration from last quarter's increase of 1%. This is partly due to the negative impact from Hurricanes Helene and Milton, but some execution issues also played a role. During the earnings call, CEO Barbara Rentler, who will be stepping down from that role on February 2, 2025, stated that the company missed on some volume opportunities in stronger product categories.
• The good news is, Ms. Rentler believes that this is correctable and that the categories where ROST is particularly strong, like cosmetics, accessories and gifting, position the company favorably for the holiday shopping season. Accordingly, the company still expects Q4 comp growth to accelerate to 2-3% in Q4.
• As ROST has seen more higher income consumers frequent its stores, it has expanded its product assortment to include more branded merchandise. This has put some downward pressure on merchandise margin, which slipped by 60 bps in Q3, following an 80 bps drop last quarter. Despite the contraction in merchandise margin, operating margin still improved by 70 bps yr/yr to 11.9%, driven by lower incentive, freight, and distribution costs.
• However, the company is expecting operating margin to contract to 11.2-11.5% in Q4, resulting in downside EPS guidance of $1.57-$1.64. Based on the positive reaction in the stock, it's evident that investors are taking the soft guidance in stride.

A combination of persistent macro-related headwinds and execution issues on merchandising weighed on ROST's results in Q3. The company is confident, though, that this holiday shopping season will be a strong one again as consumers in all income brackets seek out better values. That positive outlook is outweighing the disappointing Q3 results, providing a lift for shares.