Ross Stores (NASDAQ: ROST) delivered a second quarter that was strong even by its own elevated standards. Comparable store sales rose 10% on top of a 2% gain last year. Total sales hit $6.3 billion, up 13%. Diluted EPS of $2.66 crushed the $1.94 consensus estimate. The headline beat includes an approximate $0.60 per share benefit from IEEPA tariff refunds, but strip that out and the underlying story is still compelling: operating margin expanded 205 basis points versus the company's own plan of 130-150 bps.
Revenue of $6.26 billion came in about $118 million above the $6.15 billion estimate, a 2% top-line beat driven entirely by customer traffic rather than price increases. Management noted strength throughout the quarter, with growth supported by both new customers and higher engagement from existing ones. That is a healthy signal for an off-price model that depends on turning inventory quickly at compelling price points.
The tariff refund contributed $253 million to operating income, adding 405 basis points to the reported 610-basis-point operating margin expansion. Even excluding that one-time benefit, operating margin still rose 205 bps year-over-year, well ahead of the company's internal plan. Cost of goods sold as a percentage of sales improved to 66.2% from 72.4% a year ago, though the tariff refund accounts for the bulk of that swing. Selling, general and administrative expenses rose 14.3% to $1.02 billion, roughly in line with sales growth, suggesting no material cost creep outside the tariff item.
Management raised guidance across the board. For Q3, comparable store sales are now expected to increase 6% to 7%, with EPS of $1.75 to $1.83. For Q4, comps are guided to 4% to 5%, with EPS of $2.17 to $2.26. Full-year EPS was raised to $8.61-$8.77 from prior guidance, including the $0.60 tariff benefit. The guidance raise is notable because the back half faces significantly tougher year-over-year comparisons. Management felt confident enough to raise both Q3 and Q4 comps and EPS, suggesting the underlying demand momentum is real and not just a function of easy prior-year numbers.
The store expansion plan was also increased to 115 new locations for FY2026, up from prior plans. During Q2, Ross opened 47 new stores (35 Ross, 12 dd's DISCOUNTS). The acceleration in store growth is a capital allocation signal that management sees enough whitespace in the off-price market to deploy cash into new locations rather than returning it all to shareholders. The company repurchased $319 million in stock during the quarter under its $2.55 billion authorization and remains on track for $1.275 billion in buybacks this year. The buyback pace is aggressive relative to the $73.5 billion market cap, but it is funded by strong operating cash flow of $1.71 billion in the first half.
The tariff refund is a one-time item, but the underlying operating margin expansion of 205 bps looks structural rather than cyclical. Ross is benefiting from a favorable inventory environment where branded suppliers are willing to offer deep discounts to move goods, and the company's disciplined buying and store execution are capturing that value. The raised guidance and accelerated store openings suggest management believes this dynamic has legs.
What to watch next: the back-half comps of 6-7% and 4-5% will test whether the 10% Q2 surge was a peak or a new baseline. If Ross can sustain mid-single-digit comps on top of a 10% quarter, that would signal lasting market share gains. The tariff refund is a one-time tailwind, so FY2027 EPS comparisons will be tougher. For now, Ross is executing at a level few retailers can match.