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Ross Stores (ROST) delivers a lively Q2 (Jul) performance, surpassing top and bottom lines, growing same-store sales above its forecast, and hiking its FY25 (Jan) EPS outlook. Peer TJX (TJX) showcased just how robust demand is within off-price retail with its upbeat JulQ results earlier this week. Its performance pushed ROST to new record highs before the stock retreated mildly. With ROST further illuminating sustained value-seeking behavior amid ongoing economic headwinds, investors are quickly piling back into the stock, sending it to fresh all-time highs today. Similarly, peer Burlington Stores (BURL), which reports JulQ results next week, is also gapping up to new highs today.

• ROST continued its solid streak of earnings upside in Q2, delivering EPS of $1.59 on revenue of $5.29 bln, a 7.1% improvement yr/yr. Comps were a point higher than ROST's best-case scenario outlined last quarter, delivering +4% in Q2. Geographically, strength was broad based, while categorically, cosmetics and children's led the charge.
• Merchandise margins did continue to compress, edging 80 bps lower yr/yr, consistent with management's remarks that this metric would endure pressure throughout FY25 as it brings more branded merchandise into its assortment to better cater to the uptick in higher-income shoppers it has seen during the sticky inflationary environment. However, ROST still managed to improve its profitability, boasting a 115 bp jump in operating margins yr/yr to 12.5% as it benefited from better-than-expected top-line growth and lower distribution costs.
• While Q2 numbers were sound, the spending climate remains challenging. ROST commented that its low-to-moderate income customers continued encountering high costs for necessities, squeezing their discretionary spending capacity. This backdrop, combined with the fact that ROST is beginning to lap less favorable yr/yr results during the back half of FY25, led to its unchanged comp guidance. ROST expects comps to be +2-3% in Q3 (Oct) and Q4 (Jan), up from +5% and +7% in the year-ago period, respectively.
• However, ROST is anticipating achieving additional efficiencies over the next two quarters, offsetting the added pressure from lower merchandise margins. As a result, it raised its FY25 EPS outlook to $6.00-6.13 from $5.79-5.98, which was already raised from $5.64-5.89 last quarter.

ROST highlighted how attractive the off-price retail space continues to be with its impressive performance in Q2. Like Walmart (WMT) mentioned last week, customers of all incomes are hunting for value. As long as this trend continues, ROST is well-positioned to benefit. At the same time, even if disinflation takes hold more aggressively and incomes climb, ROST's moves to hold onto the gains it has already made keep it on solid ground to accelerate growth.

Bottom line, the economic environment may not be fitting like a glove, but ROST is extracting the most benefit from it as it brings more branded merchandise to its stores to hold onto its increasing higher-income demographic while maintaining a healthy assortment of value offerings to support lower-income shoppers while their budgets remain squeezed.