Ross Stores (ROST)

Off-price retail company Ross Stores (NASDAQ:ROST) announced better-than-expected revenue in Q3 CY2025, with sales up 10.4% year on year to $5.6 billion. Its GAAP profit of $1.58 per share was 10.9% above analysts’ consensus estimates.

Company Overview

Selling excess inventory or overstocked items from other retailers, Ross Stores (NASDAQ:ROST) is an off-price concept that sells apparel and other goods at prices much lower than department stores.

Discount retailers understand that many shoppers love a good deal, and they focus on providing excellent value to shoppers by selling general merchandise at major discounts. They can do this because of unique purchasing, procurement, and pricing strategies that involve scouring the market for trendy goods or buying excess inventory from manufacturers and other retailers. They then turn around and sell these snacks, paper towels, toys, clothes, and myriad other products at highly enticing prices. Despite the unique draw and lure of discounts, these discount retailers must also contend with the secular headwinds of online shopping and challenged retail foot traffic in places like suburban strip malls.

Off-price and discount retail competitors include TJX (NYSE:TJX), Burlington Stores (NYSE:BURL), and Ollie’s Bargain Outlet (NASDAQ:OLLI).

A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years.

With $22.03 billion in revenue over the past 12 months, Ross Stores is one of the larger companies in the consumer retail industry and benefits from a well-known brand that influences purchasing decisions. However, its scale is a double-edged sword because there is only so much real estate to build new stores, placing a ceiling on its growth. To accelerate sales, Ross Stores likely needs to optimize its pricing or lean into international expansion.

As you can see below, Ross Stores’s sales grew at a tepid 5.8% compounded annual growth rate over the last six years (we compare to 2019 to normalize for COVID-19 impacts), but to its credit, it opened new stores and increased sales at existing, established locations.

This quarter, Ross Stores reported year-on-year revenue growth of 10.4%, and its $5.6 billion of revenue exceeded Wall Street’s estimates by 2.6%.

Looking ahead, sell-side analysts expect revenue to grow 4.6% over the next 12 months, similar to its six-year rate. We still think its growth trajectory is attractive given its scale and indicates the market is baking in success for its products.

Number of Stores

Ross Stores operated 2,273 locations in the latest quarter. It has opened new stores at a rapid clip over the last two years, averaging 4% annual growth, much faster than the broader consumer retail sector.

When a retailer opens new stores, it usually means it’s investing for growth because demand is greater than supply, especially in areas where consumers may not have a store within reasonable driving distance.

Same-Store Sales

A company's store base only paints one part of the picture. When demand is high, it makes sense to open more. But when demand is low, it’s prudent to close some locations and use the money in other ways. Same-store sales gives us insight into this topic because it measures organic growth for a retailer's e-commerce platform and brick-and-mortar shops that have existed for at least a year.

Ross Stores’s demand has been spectacular for a retailer over the last two years. On average, the company has increased its same-store sales by an impressive 3.4% per year. This performance suggests its rollout of new stores is beneficial for shareholders. We like this backdrop because it gives Ross Stores multiple ways to win: revenue growth can come from new stores, e-commerce, or increased foot traffic and higher sales per customer at existing locations.

In the latest quarter, Ross Stores’s same-store sales rose 7% year on year. This growth was an acceleration from its historical levels, which is always an encouraging sign.

Ross Stores’s unit economics are higher than the typical retailer, giving it the flexibility to invest in areas such as marketing and talent to reach more consumers. As you can see below, it averaged a decent 35.4% gross margin over the last two years. That means for every $100 in revenue, $64.58 went towards paying for inventory, transportation, and distribution.

In Q3, Ross Stores produced a 28% gross profit margin, in line with the same quarter last year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting it strives to keep prices low for customers and has stable input costs (such as labor and freight expenses to transport goods).

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Ross Stores’s operating margin might fluctuated slightly over the last 12 months but has generally stayed the same, averaging 12.1% over the last two years. This profitability was top-notch for a consumer retail business, showing it’s an well-run company with an efficient cost structure.

Analyzing the trend in its profitability, Ross Stores’s operating margin might fluctuated slightly but has generally stayed the same over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q3, Ross Stores generated an operating margin profit margin of 11.6%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Ross Stores has shown terrific cash profitability, enabling it to reinvest, return capital to investors, and stay ahead of the competition while maintaining an ample cushion. The company’s free cash flow margin was among the best in the consumer retail sector, averaging 8.4% over the last two years.

Ross Stores’s free cash flow clocked in at $617.8 million in Q3, equivalent to a 11% margin. This result was good as its margin was 4.5 percentage points higher than in the same quarter last year. Its cash profitability was also above its two-year level, and we hope the company can build on this trend.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Ross Stores’s five-year average ROIC was 30.6%, placing it among the best consumer retail companies. This illustrates its management team’s ability to invest in highly profitable ventures and produce tangible results for shareholders.

Ross Stores reported $4.06 billion of cash and $5.19 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $3.13 billion of EBITDA over the last 12 months, we view Ross Stores’s 0.4× net-debt-to-EBITDA ratio as safe. We also see its $72.6 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Ross Stores blew past analysts’ EBITDA expectations this quarter. We were also glad its revenue outperformed Wall Street’s estimates. Zooming out, we think this quarter featured some important positives. The stock traded up 1.3% to $162.62 immediately following the results.

Updated: December 4, 2025 at 9:36 PM EST

Before deciding whether to buy Ross Stores or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

In our opinion, Ross Stores is a solid company. Although its revenue growth was a little slower over the last three years, its new store openings have increased its brand equity. And while its gross margins make it more difficult to reach positive operating profits compared to other consumer retail businesses, its stellar ROIC suggests it has been a well-run company historically.

Ross Stores’s P/E ratio based on the next 12 months is 25.5x. This valuation tells us it’s a bit of a market darling with a lot of good news priced in. This is a good one to add to your watchlist - there are better opportunities elsewhere at the moment.

Wall Street analysts have a consensus one-year price target of $180.06 on the company (compared to the current share price of $176.69).