Ross Stores (NASDAQ:ROST) released second-quarter financial results and hosted an earnings call on Thursday. Read the complete transcript below.
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Summary
Ross Stores Inc reported a strong second quarter with a 13% increase in total sales to $6.3 billion and a 10% rise in comparable store sales, driven by increased customer transactions.
The company plans to open 115 new locations in 2026, up from the previous guidance of 110, reflecting confidence in its expansion strategy.
Inventory levels increased by 18%, supporting higher sales and improved merchandise margins, with a focus on leveraging closeout opportunities.
Net income rose to $851 million from $508 million the previous year, with earnings per share at $2.66, benefiting from a $253 million tariff refund.
Ross Stores raised its guidance for the remainder of 2026, forecasting comparable store sales growth of 6% to 7% in the third quarter and 4% to 5% in the fourth quarter, with full-year earnings per share expected between $8.61 and $8.77.
The company emphasized the success of its customer acquisition efforts, with a notable increase in new and lapsed customer traffic and engagement across diverse demographics.
Management highlighted improved gross margins driven by tariff refunds and lower distribution costs, while noting some pressure from higher freight costs due to increased fuel prices.
Executive commentary was optimistic about the company's growth strategies, underscoring the strength of merchandising, marketing, and store initiatives in enhancing customer experience and driving sales.
Full Transcript
Diego, Investor Relations
Good afternoon and welcome to the Ross Stores Second Quarter 2026 Earnings Release Conference Call. The call will begin with prepared comments by management followed by a question and answer session. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call will contain forward-looking statements regarding expectations about future growth and financial results, including sales and earnings forecasts, new store openings, and other matters that are based on the company's current forecast of aspects of its future business. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from historical performance or current expectations. Risk factors are included in today's press release and in the company's fiscal 2025 Form 10-K and fiscal 2026 Forms 10-Q and 8-Ks on file with the SEC. Now I'd like to turn the call over to Jim Conroy, Chief Executive Officer.
Jim Conroy, Chief Executive Officer
Thank you, Diego, and good afternoon, everyone. Joining me on our call today are Michael Hartshorn, Group President and Chief Operating Officer; Bill Sheehan, Executive Vice President and Chief Financial Officer; and Connie Kao, Senior Vice President, Investor Relations. Before discussing our results, I want to recognize the outstanding team across the company and throughout the country. The robust sales and earnings growth in the quarter are a direct reflection of your hard work and commitment to the ROST organization.
Thank you. Now turning to our results, we are extremely pleased with the 10% comparable store sales growth we delivered in the second quarter, marking the second quarter in a row with double-digit comp growth. Sales were strong in May and improved sequentially each month, with July delivering our strongest performance. Despite cycling a strong back-to-school performance last year, customer traffic once again served as a primary driver of our comparable store sales increase, which underscores the durability of our growth and the momentum we are building.
We believe the increased traffic reflects the effectiveness of our customer acquisition efforts. During the quarter we saw gains from new and lapsed customers along with more frequent trips and higher spending from existing customers, reflecting deeper engagement with both of our chains. Importantly, the new customers we are attracting span a broad range of income demographics and age cohorts, including younger shoppers, which we believe reflects the broad appeal of our brand and the success of our marketing efforts in reaching and engaging a diverse customer base.
Once in our stores, both new and existing customers are responding to our compelling values and a broader selection of fashion and brands. The merchants and planners have done a terrific job of opening new vendors and satisfying the demands of a wide variety of customers. Finally, our stores organization has done an excellent job enhancing the in-store shopping experience and managing the elevated sales volumes. We feel great about the early success of our growth strategies and have confidence in our ability to continue to gain market share consistent with the trends we saw in recent quarters.
The strong performance at Ross was broad-based across both merchandise categories and geographies in the second quarter. Home and cosmetics were our strongest businesses. By geography, we saw strength across all markets, with the Midwest performing the best. dd's Discounts also delivered solid sales and saw similar broad-based performance across merchandise areas and geographic regions. Turning to inventory, consolidated inventories at quarter end increased 18%.
Packaway represented 36% of total inventory compared with 38% last year. We are leveraging our inventory position to not only meet the demand of higher customer traffic in our stores, but also to broaden our merchandise offerings on the selling floor across our store base. These efforts are leading to higher sales and improved merchandise margins while maintaining fast inventory turns. We are pleased with both the level and composition of our inventory and continue to have plenty of flexibility to capitalize on closeout opportunities as we enter the fall season.
Turning to store growth, we are now planning to open 115 locations in 2026, up from 110 in our prior guidance. We are particularly encouraged by the strength of our recent openings in both existing and newer markets, giving us added confidence in our ability to continue to grow our store base over time. Our plans also contemplate approximately five to ten store relocations and closures. Overall, we remain confident that the actions we are taking across merchandising, marketing, and stores are enhancing the customer experience and driving strong performance.
While the results to date are encouraging, we believe we are only beginning to realize the full potential of many of our initiatives. Our sustained sales performance reinforces our confidence that our more growth-oriented approach is resonating with customers. The team is energized by the opportunities ahead, and we see significant runway to build on the current momentum and drive continued sales gains over time. Now Bill will provide further details on our second quarter results and additional color on our outlook for the remainder of the year.
Bill Sheehan, Executive Vice President and Chief Financial Officer
Thank you, Jim. Building on our success from the first quarter, we reported very strong sales and earnings results for the second quarter. Total sales for the period grew 13% to $6.3 billion with comparable store sales increasing 10%. As Jim mentioned earlier, the double-digit comp growth was primarily driven by an increase in the number of transactions. Gross margin improved by 625 basis points, driven primarily by 405 basis points of tariff refunds.
Merchandise margin increased by 110 basis points while distribution costs were lower by 100 basis points given favorable timing of packaway-related expenses, higher productivity, and as we anniversaried last year's tariff-related processing costs. In addition, occupancy costs leveraged by 25 basis points. Partially offsetting these benefits were buying costs, which deleveraged by 5 basis points from higher incentives, and an increase in freight costs of 10 basis points due to higher fuel prices.
SG&A for the period deleveraged by 15 basis points due to higher incentives. Given the earnings outperformance, second quarter operating margin increased 610 basis points, which included the aforementioned 405 basis points from tariff refunds. Excluding this benefit, operating margin increased 205 basis points compared to the prior year. Second quarter net income was $851 million compared to $508 million last year, and earnings per share were $2.66 compared to $1.56 in the prior year period.
Sales for the first six months of 2026 grew 17% to $12.3 billion, up from $10.5 billion in the prior year. Comparable store sales for the first half of 2026 were up 13%, and earnings per share were $4.69 compared to $3.03 for the first half of 2025. As a reminder, both the second quarter and first six months results in 2026 include $253 million, or approximately $0.60 in earnings per share, of tariff refunds. Now to our shareholder return activity.
As noted in today's release, we repurchased approximately 1.4 million shares during the quarter for an aggregate total cost of $319 million under the two-year, $2.55 billion authorization approved by our Board of Directors in March of this year. We remain on track to buy back a total of $1.275 billion in stock during 2026. Now let's discuss our outlook for the remainder of 2026. As noted in today's press release, we exited the quarter with building momentum, and we are excited about the plans we have in place as we enter the fall season.
Despite facing significantly more challenging year-over-year comparisons in the back half of the year, we are raising our outlook for both the third and fourth quarters. Comparable store sales are now forecasted to increase 6% to 7% in the third quarter, with earnings per share expected to be in the range of $1.75 to $1.83 versus $1.58 last year. Our guidance assumptions for the third quarter of 2026 reflect total sales are forecast to increase 9% to 11% versus the prior year if same store sales perform in line with our forecast.
Operating margin for the third quarter is planned to be in the range of 11.7% to 12.0% compared to 11.6% last year. Our forecast reflects leverage from the expected comp store sales increase as well as slightly higher merchandise margins. Partially offsetting these benefits are higher freight costs given the increase in fuel prices. As mentioned earlier, we raised our new store opening plans for the year and now expect to open 51 stores during the third quarter, including 41 Ross and 10 dd's locations.
Net interest income is estimated to be approximately $30 million. The tax rate is projected to be about 25%, and diluted shares outstanding are expected to be approximately 319 million. Moving to the fourth quarter, comparable store sales are now expected to increase 4% to 5% on top of a robust 9% increase last year. Earnings per share are planned to be in the range of $2.17 to $2.26 compared to $2.00 for the same period in 2025. If the second half of 2026 performs in line with these projections, earnings per share for the full year are now forecast to be in the range of $8.61 to $8.77 versus $6.61 last year.
Included in this year's forecast is approximately $0.60 of earnings per share from tariff refunds. Now I'll turn the call back to Jim for closing comments.
Jim Conroy, Chief Executive Officer
Thank you, Bill. We delivered robust first half results and remain encouraged by the positive trends we are seeing across the business. While we are pleased with the progress we have made over the last several quarters, we remain focused on building on that momentum. The work underway across the organization is centered on continuing to strengthen our brand relevance, delivering world-class merchandise assortments, and further improving the in-store experience.
We believe we have only begun to tap into the full growth potential of the business. At this point we would like to open the call and respond to any questions that you may have.
OPERATOR
Diego, thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Matthew Boss with JPMorgan. Please state your question.
Matthew Boss, Analyst at JPMorgan
Thanks, and congrats on a really great quarter.
Jim Conroy, Chief Executive Officer
Thanks, Matt.
Bill Sheehan, Executive Vice President and Chief Financial Officer
Thank you, Matt.
Matthew Boss, Analyst at JPMorgan
So Jim, could you elaborate on the build in top line momentum that you saw across the second quarter and drivers of this exit rate strength? And just despite the tougher comparisons, could you speak to the opportunity you see remaining in the back half of the year and beyond across the assortment, marketing, and store execution?
Jim Conroy, Chief Executive Officer
Sure. Happy to. The quarter was really solid and we're thrilled by not only the underlying growth number, the 10 comp, but the quality of the comp. It's really driven mostly by more transactions. Those transactions are driven by customer capture, both new and regaining lapsed customers. We're seeing existing customers shop more frequently, we're seeing all customers spend more. So the customer KPIs are just extremely solid. The merchandise KPIs are also solid.
So we've seen broad-based strength across all merchandise categories in both chains, Ross and dd's. Geographic metrics are equally strong, so we've seen broad-based strength across the country. As we went through the quarter, we felt World Cup a little bit in June; we saw a really strong July, and if you recall on our last year, we talked about July had a very nice acceleration from June. So hitting a strong July, a very strong July, which you could surmise had to be more than 10% if it was the strongest month of the quarter up against a very strong July last year, the exit velocity was very, very good.
We got into August where we continue to be very encouraged by the current business and the momentum that's been building. Last year, August was the strongest month of the quarter, so we continue to believe that we shouldn't be concerned about cycling strong comps. And on prior calls we've talked about sort of two schools of thought: can you comp the comp versus are you building momentum and can the flywheel continue to grow the business? Hopefully after the fourth quarter of really strong comps and laying out next two quarters of, we believe, pretty solid guidance, we can extinguish that concern because the underlying metrics that we see are just extremely positive across the board. If you come all the way back to some of the initiatives that we started last year, they're all still in the early innings, and some of them have been implemented across the chain, but some are only in some stores. Some of them have been implemented across all merchandise categories and others are still waiting to be further implemented. And of course we've also launched new initiatives. So I can't underscore enough that our outlook for the balance of the year continues to be extremely positive, with a number of opportunities to continue the growth that we're seeing.
Thank you.
OPERATOR
Your next question comes from Lorraine Hutchinson with Bank of America. Please state your question.
Lorraine Hutchinson, Analyst at Bank of America
Thanks. Good morning, Jim. You just did a 10 comp and you're still talking about a lot of these initiatives being early stage. So can you talk a little bit about which of these initiatives you see having the most runway to continue to drive to this guided comp strength?
Jim Conroy, Chief Executive Officer
Sure. I'll talk at a relatively high level. One of the things I've learned is my natural propensity to provide more detail just exposes us to other retailers sort of picking up what we're doing and trying to emulate them very quickly, but with some desire to provide some transparency. Let's anchor back to sort of merchandising, stores, and marketing. And I could list probably a dozen initiatives onto each of those. The merchant team has really done a great job of continuing to build great assortments, opening up new vendors and new brands, starting to tell better merchandise stories across categories.
The stores team has—I’d encourage everybody on the call to go to a store—and you'll see very well-organized stores, inventory being recovered quickly, queue lines are shorter. So the stores team has really been able to rise to the challenge of a pretty sharp acceleration in sales over the last year or so. And then from a marketing standpoint, again, you can see what we are doing. From a marketing standpoint, you can see our spots, you can follow us on social media.
We are getting a tremendous amount of engagement with our new creative messaging. We have tweaked our media mix. But if I went through each of those points that I just made and the other dozen or so points that I haven't explicitly called out, there's no way you could believe that we fully executed and implemented all of them. So we sit and look at the business and just wake up every day with more ideas to continue to drive more growth.
Lorraine Hutchinson, Analyst at Bank of America
That was really helpful. Thank you.
Jim Conroy, Chief Executive Officer
Of course.
Lorraine Hutchinson, Analyst at Bank of America
Thank you.
OPERATOR
Your next question comes from Corey Tarlow with Jefferies. Please state your question.
Corey Tarlow, Analyst at Jefferies
Great. Thanks, Jim. The comp momentum continues to be very impressive and a lot of the work that we've done around marketing continues to show really strong momentum there. I'm just curious how you think about how the marketing is fueling new customer acquisition and whether or not these newer customers that you are acquiring are higher income in nature and the types of products that these customers are purchasing as well relative to some of the products that you have in your priority assortments. Thanks.
Jim Conroy, Chief Executive Officer
Sure. The marketing team—both the creative team and the analytics team and the folks that are buying our media—I think are doing a tremendous job. And I circle back to you, but we're still learning. We still think there's some more opportunity for us to improve. We've absolutely seen brand new customers come into Ross and dd's that hadn't shopped with us in the past, as well as recapturing customers that perhaps used to shop with us and they're returning.
In terms of what the new cohort of customers look like, I couldn't describe a better report card if I'm honest. The quick answer is our new customer, and the profile of them as a group, look very similar to the composition of our current customers, which would imply that we're seeing growth across every single household income group that we track, every single age group that we track, and every single ethnicity. So it's been just a broad-based increase in customer capture across all dimensions, which is handy because that means that the proposition that we have in the stores that we already know works for our current customer will work for sort of a new cohort of customers. Does that answer your question?
Corey Tarlow, Analyst at Jefferies
Yes, it's very helpful. Thanks so much and best of luck.
Jim Conroy, Chief Executive Officer
Thank you.
OPERATOR
Your next question comes from Chuck Grom with Gordon Haskett. Please state your question.
Chuck Grom, Analyst at Gordon Haskett
Hey, thanks a lot, Jim. Could you talk about your success over the past year and how it's translated into a stronger vendor flywheel, both in terms of new suppliers entering the mix, but also deeper relationships with existing vendors? And then the follow-up question is just on the lapsed customer opportunity. I don't think you brought that up in the past. Can you maybe just size that up for us? Thank you.
Jim Conroy, Chief Executive Officer
Sure. Having only been here for a little over 18 months now, I continue to marvel at the strength and partnership that we have with the vendor community. And they're true partners and they're the lifeblood of our growth. The team—and this absolutely predates me; I'm learning off-price—the team under Karen, and Karen in each of the divisions, absolutely aim to be genuine partners and easy to work with with our vendors. And I hear that all the time.
The partnership with our current vendors and bringing on new vendors, I think, ties to the same two or three things that are happening within the business. Number one, just our growth. We're continuing to post nice growth. I think any vendor appreciates that and maybe a rising tide lifts all boats. The second piece is some vendors that perhaps had been resistant to sell to off-price or maybe specifically to Ross in the past now go to the stores and see that their product will be showcased and merchandised in a sort of neat and tidy way.
And what the stores team has done in enhancing the shopping experience in-store has probably further helped the experience with our vendors because they know that the product will be treated with great care. And then finally, I do hear oftentimes from our vendors, as they see the change in the brand positioning, that they believe it's a fun and exciting brand now and they want to participate in it. So when you put all those three things together, I think the partnership with our existing vendors continues to be quite strong, and the merchants and their persistence in trying to open up more and more brands has continued to become more successful.
I'm not convinced I answered both of your questions. Did I cover everything?
Chuck Grom, Analyst at Gordon Haskett
You definitely answered the first one. I was curious: you talked about a lot of the traffic being from new customers, but also from lapsed customers. So just was wondering if there was a way to size up that opportunity and maybe how the team is going after those lapsed customers maybe a little bit more aggressively.
Jim Conroy, Chief Executive Officer
Sure. Let me just give you a little insight as to how we get that information. We use a third-party credit card vendor—it's widely available on the market if anyone wants to pay for it—so we can see credit card numbers that haven't been in the store in X period of time and then when they return. So that's how we're measuring it. It's somewhat of a new muscle. We are strategically prospecting for them from a marketing standpoint and how we're spending our money, and now we have an ability to measure it based on that credit card data.
Albeit it might be a little rough, it's certainly directional. And the goal, of course, is to show them just a world-class merchandise assortment once they get in the store and have them have a great experience and encourage them to come back and come back more frequently. And we're seeing that as well.
Chuck Grom, Analyst at Gordon Haskett
Understood, thank you.
OPERATOR
Your next question comes from Paul Lejuez with Citigroup. Please state your question.
Paul Lejuez, Analyst at Citigroup
Hey, thanks, Jim. I'm curious if there's any way you can quantify for us the number of new customers that you're seeing on a year-over-year basis. How does it look in 2Q sales coming from new customers versus what you saw in 1Q? And kind of the same question on the vendor side: any way to frame the number of vendors you're currently working with today versus, let's say, a year ago? How would you characterize the new vendors? Is there a common thread, and what is ultimately the right number of vendors to be working with?
Jim Conroy, Chief Executive Officer
Sure. On the vendor question, there are times when we're trying to invite in a stronger national brand into the store, and when they come in, there's occasion when it's a net new add, but there's also an occasion where they take the space from a vendor that perhaps is more tertiary in nature. So the vendor count wouldn't really get you there. I think if you walk the store and look at the vendor brand plates that are in the store, you'll start to get a sense for not necessarily always higher price point vendors, but just the strength of the brands that we're carrying now, which honestly is just an extension of the brand strategy that started a few years ago. In terms of quantifying the customer capture, it would be hard to provide that much data, and I suppose it's a little proprietary also. But if you parse out some of the things we've said: at 10 comp, most of that was transactions; a small portion of it was an increase in basket; and of those transactions it was a combination of brand new customers, returning customers that used to shop with us, and existing customers shopping more frequently.
I wouldn't say it's a third, a third, a third necessarily, but I would think of it in those three buckets. So each of them are meaningful in their own right, meaning just the new customers that are coming, we're just recapturing the lapsed customers, we're just getting current customers to shop more frequently. And again, I think we can continue to find opportunities to do more of all of that.
Paul Lejuez, Analyst at Citigroup
Got it. Thank you. Good luck.
OPERATOR
Your next question comes from Michael Binetti with Evercore ISI. Please state your question.
Michael Binetti, Analyst at Evercore ISI
Hey guys, let me add my congrats on a nice quarter. I'll ask one and then if it's okay, I'll ask a follow-up after. But you know, you've talked a lot about better vendor acceptance, stronger merchandise availability as you know the sales and the store experience have improved. Has that changed the quality of what each of these vendors is willing to offer you? Or are you getting more access to the better and best side of the assortments? And more importantly, is buying in those higher tier categories from these vendors more competitive with other off-pricers than what you've seen in the past?
Jim Conroy, Chief Executive Officer
I didn't quite follow the second part of your question, the first part is are we getting more vendors and even higher end or better quality product? What was the second part of your question?
UNKNOWN Analyst
As you get access to the better and best side of the assortments, are the buyers finding those higher tier categories of these vendors more competitive with other off-pricers?
Jim Conroy, Chief Executive Officer
I see. I think the answer to the first part of your question is yes, we're getting more access to better brands, more popular brands, not necessarily always higher price point brands. And in terms of are they more competitive? I think all of the off-pricers and one of them is already reported the opportunities from a supply side standpoint, from a closeout standpoint, are they outstanding? There's plenty of product to continue to fuel the fire. And I think we've always been competing to some degree for that next buy and we have some formidable competition out there.
We're helped a little bit right now because of the outsized growth. So I think occasionally we're getting the ability to open up vendors because we're growing more or one of our competitors may not want more product or need more product. So I think there's a number of factors and we still have plenty of work to be done in front of us to continue to knock on doors and just be persistent with brands that we'd like to bringing to the store. To the extent that I'm calling vendors from time to time trying to open them up, if I can help,
Michael Binetti, Analyst at Evercore ISI
If I could ask a follow up, as you think beyond this year, which has been kind of remarkable, do you believe the business ultimately settles back into what we think of as a traditional off-price 3% to 4% algorithm on same-store sales? Or do the ongoing pilot and implementation of the initiatives you talk about in marketing and merchandising, customer acquisition, do those support comp potential above that for another year? What would need to continue working for the latter to be true?
Michael Hartshorn (Group President and Chief Operating Officer)
Michael, it's Michael Hartshorn.
Michael Binetti, Analyst at Evercore ISI
Hi Michael.
Michael Hartshorn (Group President and Chief Operating Officer)
Clearly, how are you? We're clearly pleased with the current performance and trend and as Jim said multiple times, many of the things that we're testing in store testing, in merchandising and even testing and marketing, they're very early stages. So we think we can certainly grow beyond where we're trending today and be able to comp on top of the very strong comps this year. I think from a. Is it time to update the long term algorithm? I think the right time to do that would be further along in some of the initiatives we have in place. So at this point we wouldn't update kind of the long term year over year algorithm and hope to beat that long term algorithm in the short term.
Michael Binetti, Analyst at Evercore ISI
Okay, thanks a lot guys. Congrats again.
Michael Hartshorn (Group President and Chief Operating Officer)
Thank you.
OPERATOR
Your next question comes from Alex Stratton with Morgan Stanley. Please state your question.
Alex Stratton, Analyst at Morgan Stanley
Perfect. Thanks so much. Maybe Jim, as you look forward, do those initiatives you've spoken to require a structurally higher level of investment to sustain that high comp growth or do you believe most of the investment is already reflected in the current cost structure? And I just have one follow up.
Michael Hartshorn (Group President and Chief Operating Officer)
This is Michael again within the cost structure and you can see it in the results in the P&L and from the capital structure. Clearly we've expanded our unit growth which that takes additional investment but that's the best investment we can make in the company. Usually that capital pays back in a matter of two to three years. In all the initiatives the biggest impact you can have is across 2,300 stores. And we have very good test and learn capabilities.
So the investments we're making we're first testing in pilot stores. And if it makes sense, it's going to make sense not only in the if it's a capital investment, it's going to make sense through the P&L. So despite the initiatives we have in place, we've been able to leverage store payroll this year, been able to leverage. The SG&A as a whole. We'll continue to test if it works on the total P&L. We'll make the investment and we've been very happy with how we've been able to manage putting these new initiatives in place and managing our capital and expenses.
Alex Stratton, Analyst at Morgan Stanley
Great. I'll leave it there. Thanks.
OPERATOR
Your next question comes from Brooke Roach with Goldman Sachs. Please state your question.
Brooke Roach, Analyst at Goldman Sachs
Good afternoon and thank you for taking our question. I had a follow up on Alex's question which is that given the success of each of these growth initiatives, are there any areas where you think you should lean in and increase the pace of these investments, whether it's marketing or otherwise? Maybe said another way. Is there a change in your thinking about the typical level of flow through that we should see per point of comp outperformance versus your guide?
Jim Conroy, Chief Executive Officer
Maybe I can start with that one. And Michael or Bill could add if necessary. We have been asked that question, should we be doing even more? Could we drive even more growth? We're pretty pleased with the underlying growth that we have right now. And so demand generation hasn't been a huge challenge for us with all of these things working together and our flow through One of the questions, when we get ourselves organized to prepare for a call, we say, all right, well, sales have been really strong. What's our flow through? Are we going to meet those expectations? And the answer to that question for the last four or five quarters has been yes.
So for the time being, we're going to continue to work largely within the economic model that we have with the flow through assumptions that are out there. I guess I would just signal if there was a point in time in the future where we thought we were going to over invest or over club something, betting on the come for future, future longer term value. I'd really like to bring that to the market before we just do it and then surprise you at the end of the quarter. So right now, with the exception of some small things here or there that have been subsumed in the growth that we're seeing, we're working within the financial construct of the business that's been in place for years now.
Bill Sheehan, Executive Vice President and Chief Financial Officer
So yeah, Brooke, I mean, that same, you know, 10 to 15 bps per 1% of comp model still holds.
Brooke Roach, Analyst at Goldman Sachs
Great. Thanks so much.
Jim Conroy, Chief Executive Officer
Of course. Thank you, Brooke.
OPERATOR
And your next question comes from Mark Alschwager with Baird. Please state your question.
Mark Alschwager, Analyst at Baird
Thank you. Good afternoon. Maybe first question, just following up again on the margin. Maybe a little bit more near term focus. If my math is correct, I think the implied raise in the back half is a bit more than that 10 to 15 basis points as we look at just how much the earnings went up relative to the comp raise, I guess. Is that right? And maybe what are the other factors affecting the flow through assumptions in the back half? Aside from better leverage on higher sales, has anything changed in terms of your view on the margin puts and takes for the back half?
Thank you.
Michael Hartshorn (Group President and Chief Operating Officer)
Yeah, I think that back half we're in line with the comp raise that we have there on the 6 to 7 to 4 to 5 comp raise, I think we're seeing that top line momentum and we feel good about what's in place there. But our guidance reflects some of what we talked about there. Higher merchandise margins, some lower DC costs. So it's in line.
Mark Alschwager, Analyst at Baird
Okay. And then maybe a bigger picture one on the competitive backdrop. A number of the large national chains are leaning harder into price investment this year in the back half of this year, reinvesting some of the tariff refunds. Given the acceleration through the quarter that you cited and the August trend, it doesn't seem like that's having an impact. But even so, how are you thinking about protecting the value gap in this environment and what are your assumptions for ticket growth in the back half and how that might change as you maintain your competitive pricing?
Jim Conroy, Chief Executive Officer
Sure. Starting with the overarching premise that we always want to have sort of that pricing umbrella and be underneath mainstream retail. The second piece is one of the things. If you were to retroactively go back through the last four quarters, we were very hesitant to pass through AUR increases. So much so that we called out some impact to our earnings when tariffs first came to bear last year. So I think a lot of other retailers took a different position in trying to pass that along and maybe now sort of reversing course, we've tried to maintain a little bit more stability.
And in today's environment, today's inflationary economy, we absolutely want to have the best values in our store. And if we were to see something where we didn't have that price umbrella under mainstream retail, we would make a change. But I think we are still safe where we are now for the back half of the year, you'll likely see some very modest AUR increases sort of at the same sort of levels that we're seeing now, low single digit. And we really want to be there for a customer that's battling higher gas prices and all the other inflation pressures that they have in their life.
So it's an important question, it's a strategic question. But I'm liking sort of the consistency of our pricing strategy right now. And I think as it stands, if we were to do some competitive price shopping, we would look very, very competitive.
Mark Alschwager, Analyst at Baird
Thank you.
Jim Conroy, Chief Executive Officer
Of course,
OPERATOR
Your next question comes from Ike Burchow with Wells Fargo. Please state your question.
Ike Burchow, Analyst at Wells Fargo
Hey, let me add my congrats. Was wondering if we could dig into the back half margins. Just curious if you can maybe let us know what's going on in the gross margin within your plan for the third quarter and the fourth quarter. And then specifically I know you call that freight as a 10 bps headwind in the second quarter. Does that worsen in the back half? Kind of. What have you seen with contracts over the last. Since the last time we heard from you?
Just kind of curious how to think about the freight line within that. Thanks.
Michael Hartshorn (Group President and Chief Operating Officer)
Yeah, certainly you heard the specifics on Q3. We'll obviously provide more specifics on Q4 margin when we report the Q3 results. But we do anticipate merchandise margin will remain a tailwind and some benefit in DC costs. I think similar to Q3, we are projecting domestic freight to deleverage due to higher fuel costs. And as you can surmise, that raised sales guidance in Q4 would imply some EBIT margin improvement versus last year. So on fuel, we don't hedge fuel costs. The biggest component of our freight is fuel. So if things are going to change materially on the fuel side from where they are today, that would have an impact. But we do have embedded in our guidance right now, higher fuel.
Ike Burchow, Analyst at Wells Fargo
Is that impact more detrimental in the third quarter and fourth quarter than it was in the second quarter?
Michael Hartshorn (Group President and Chief Operating Officer)
I think it kind of depends what happens with fuel prices. We have our best estimate from where they are now, but again, it kind of depends on where, where it goes from here.
Ike Burchow, Analyst at Wells Fargo
Okay. Got it. All right, thank you.
Michael Hartshorn (Group President and Chief Operating Officer)
Thank you.
OPERATOR
Your next question comes from Jay Sole with UBS. Please state your question.
Jay Sole, Analyst at UBS
Great. Thank you so much, Kim. I'm curious about trying to understand the content a little bit better because it sounds like transactions was a big driver, which presumably means traffic. But a lot of the key initiatives like getting better brands, holding more inventory, the store, those aren't really traffic drivers. Whereas like marketing, which would be a traffic driver or better in-store execution could drive transactions. But those sort of sound secondary.
Are we sort of missing the point that maybe the marketing is a bigger driver of traffic? And some of the merchandise initiatives have yet to really, you know, show the results that you're expecting that you're starting to see. And maybe that's why you see, you know, only the beginning of the improvement at Ross, being able to continue for longer term.
Jim Conroy, Chief Executive Officer
That's a great question, Jay. Hopefully, hopefully we're being clear. I think all three pieces work together. The part we don't have great—we don't have a great ability to parse out is if we see an increase in transactions, there are probably times when it's a customer that maybe was going to shop anyway and wasn't always going to buy. But now the assortment is great or the store looks better and now they get converted, and we can't connect that last piece of the arithmetic because we don't have traffic counters.
But if you think about what's driving the traffic, the logical place to go is great creative, a great way of spending the media. And we're continuing to tweak our media mix and capturing sort of a whole cadre of customers—new and customers that used to shop with us—and perhaps encouraging existing customers to come back more. Now there is a thesis, and part of this is true, I'm sure, that there's an existing customer that had shopped with us with some periodic frequency, and now she comes in and she feels great about the assortment and the store looks better and she doesn't wait in line as long.
So now she's just shopping more frequently. I can't fully, or we can't fully, attribute that to marketing efforts. It might just be a better experience that she is now shopping more frequently and potentially telling others. So we try to split it into three handy buckets, meaning marketing drives sales and the store experience. And of course, the assortment converts—marketing drives traffic and the assortment and store experience converts that traffic into buyers.
But it's not quite that clearly delineated between the different pieces. So I'm not sure I've answered your question, but we are absolutely challenging marketing to continue to fill top of funnel customers. That's working. We're challenging the merchants to bring the best assortments, continue to add new vendors. That seems to be working. And the store experience has absolutely improved, not only anecdotally when we shop the stores, but we have metrics and customer survey instruments that are telling us that, so all of them work together.
We continue to call it sort of the flywheel or the virtuous cycle and we're going to continue to try to roll that forward.
Jay Sole, Analyst at UBS
That's helpful. Tim, let me ask you one more if that's okay. Just kind of want to help understanding how you're thinking about brand relevance because, you know, we all saw what happened at Boot Barn and how much, you know, brand relevance increased over a multi-year period. But can you just tie the importance of improving brand relevance of Ross to getting better brands in the store? How much are you making sort of that connection where it's not just about getting more consumers or a higher income consumer, but it's also about selling Ross to the vendors who are going to give you the products that you really want.
Jim Conroy, Chief Executive Officer
It was a very astute connection of two dots there, Jay. We want Ross and dd's to both resonate with consumers in their own right as brands. And the underlying proposition of both of them right now are very, very strong value orientation. And we don't want to lose that. We do think we can be more than that, and that's what we are trying to do. And you can see it—it's no secret, unfortunately—but you can see it in our Instagram posts. We will swing from product and value stories and posts and then we'll push towards sort of more storytelling and creative stretches.
And that's intentional and it seems to be working.
Jay Sole, Analyst at UBS
Got it. Okay. Thank you so much.
Jim Conroy, Chief Executive Officer
Of course. Thanks, Jay.
OPERATOR
And your next question comes from Dana Telsey with Telsey Advisory Group. Please state your question.
Dana Telsey, Analyst at Telsey Advisory Group
Hey, everyone. Congratulations. It's so nice to see the progress. As you think about the categories that you called out—Jim, cosmetics and home being strong drivers—last quarter, I think it was ladies and cosmetics. So cosmetics has been consistent. Any update on apparel or on ladies and how that performed? And then the uptick in the new store openings—any in the Northeast or where do you see them going? Where do you see them opening? And is the size at all different?
And does the acceleration this year in new store openings, does it suggest that we could see an accelerated pace of new store openings going forward in future years? Thank you.
Jim Conroy, Chief Executive Officer
Okay, I'll start and then Michael will do the stores piece on the category growth. Yes. Let me just start off with the ones that you called out. Cosmetics was strong. Michael Kojum and Stephanie Levitt—that team, Stephanie Levitt's team—has done a really nice job quarter after quarter of growing that business. The home business was very strong in this quarter. And to sort of play back the tape, that was a business that, while growing, was growing slightly less than company average and is now—we have kind of the home business is outpacing company average.
So we've seen particular strength in both Ross and dd's and even really unique strength in sort of the more fashionable parts of home, decorative home and housewares, and that growth in mid-teens. So hats off to Gurmead and his team. From a ladies perspective, the ladies business continues to be very strong. We didn't call it out, so it's not one of the top two. But you often kind of remind us of how that was part of the brand strategy, et cetera.
And in Q1, it was comp enhancing. In Q2, it's slightly below the company average but pretty much in line. We've seen some nice growth in the younger parts of that business, particularly juniors. So that part of the strategy continues to be strong. But as I stare at a sheet of paper in front of me that admittedly I recognize you all see, it's just really encouraging to look down a column of numbers and see every single major merchandise category comp positive.
Michael Hartshorn (Group President and Chief Operating Officer)
Dana, on real estate, the team has done just an outstanding job in really growing our pipeline. And the intent is to grow that so that we have, year over year, 5% unit growth is what's in our model. This year we had these five stores that we added—were stores that were teetering on could we open them this year, get through the negotiations and construction, or should we open them in spring of next year? And the team again did a good job and they're ready to go this year.
So that's really the increase. In terms of where we're going, clearly you see us entering the Northeast. We've been very happy with that performance. Our overall new store performance this year—we had planned the year around 70% to 75%. We have half of the fleet in place this year and they're running ahead of that. So we'll see how the fall openings do. But we're very excited about growth, growth in the Northeast. You also mentioned store size. We really haven't changed our store size, but it's on a site-by-site basis. Sometimes we'll take on more real estate and sometimes less than the average. But we're really excited about our expansion opportunities.
Dana Telsey, Analyst at Telsey Advisory Group
Thank you.
Jim Conroy, Chief Executive Officer
Of course.
OPERATOR
Your next question comes from Adrian Yee with Barclays. Please state your question.
Adrian Yee, Analyst at Barclays
Great. Thank you very much. And I'll add my congratulations. Really great quarter. I guess my first question is, are you seeing any shift in the inventory availability from closeouts at retail versus wholesale partners and vendors? And then secondarily, if you can talk about any categories—I mean, obviously home has been great, cosmetics, beauty, etc. Are you seeing any categories that are becoming more competitive or where you think you are underpenetrated and you can be more competitive in the landscape?
Thank you very much.
Jim Conroy, Chief Executive Officer
Sure. No meaningful shifts to the first part of your question. The closeout opportunities are very strong. We do see categories where we think we can grow or we think we are underpenetrated relative to where we should be or relative to where some of our off-price competitors are. So there are certain places we're pressing for more growth. I'd rather not sort of divulge specifically what they are, but that is something that we look at all the time, which is what's our percentage of business by category and how do we think that compares to some of the other folks out there.
In terms of competing for goods, there's definitely a piece of that in off-price. However, availability is strong. There's a lot of goods being canceled. So as you see some of the softness in mainstream retail right now, there's a lot of goods becoming available and we expect that to continue. So we'll get our fair share, our competitors will get their fair share, and off-price at the end of the day will probably continue to be a winning sector, and we hope to be leading that sector.
Adrian Yee, Analyst at Barclays
Great. And my follow-on question is a little bit of a higher-level question. As you think about how sort of AI and agentic search is going to be much more directing the consumer to where they need to purchase, how do you think that impacts off-price over time?
Jim Conroy, Chief Executive Officer
Look, AI is everywhere. It's in every conference room and every boardroom across the country, so it's going to be important to us. Of course, way before I got here, Michael and the IT team had already started investing in sort of a foundational data element that we need to rely on to integrate AI. And then as we go function by function across the business, we don't look at any new process or any sort of system application without figuring out a way to enhance it further with AI.
So that could be analytics or whatever—we're doing planning and allocation. Of course, the software developers are using it every day. What it's unlikely that we'll do—and we've seen other companies do this—is stand up an entire separate functional area within the organization that only does that. We'd much rather have it integrated within how we operate the business. So it'll be an enhancer to how we operate. I'm sure we'll get questions on it in the future.
I can tell you I'm personally very bullish on AI, but I also see tremendous opportunity for us to just execute on sort of basic blocking and tackling and continuing to improve the customer experience, improve our assortments, and continue to drive sales growth. And AI could just be icing on the cake on top of that.
Adrian Yee, Analyst at Barclays
Great. Thank you very much. Best of luck.
Jim Conroy, Chief Executive Officer
Thank you.
OPERATOR
Our next question comes from Christina Katai with Deutsche Bank. Please state your question.
Christina Katai, Analyst at Deutsche Bank
Hi, good afternoon and congratulations on a really excellent quarter. So you described the new customer cohort as having, I believe you said the word "exceptionally strong report card." Can you talk about the metric or the various metrics that have exceeded your expectations the most? And then secondly, Jim, when you were discussing still being in the early innings, I think you said some initiatives have been implemented chain-wide, some in certain stores, some in certain categories.
So when we sort of take a step back, what percentage of stores are currently opening under this new playbook? If you could just sort of frame that up for us in terms of opportunity.
Jim Conroy, Chief Executive Officer
All right, I'll try to help clarify both of those because it sounds like maybe I wasn't crystal clear on either. On the first piece, I think what I said, or at least what I was trying to say, is the performance indicators from a customer standpoint are extremely strong. And what I mean by that is the dimensions, perhaps, are there's four of them. One is, are you seeing customer capture from new customers, people that have essentially never shopped Ross before?
Yes, we are. We're also seeing shoppers that have shopped with us in the past and perhaps have gone away and we haven't heard from them in two or three years, and they've returned. So we've seen that and we've seen an increase year over year versus last year in that group. Then we can measure the frequency of our existing shoppers and we're seeing them shop more frequently, and then we can see our basket go up. So they're all spending more money.
So that's the sort of report card rounding out that part of your question. The new customers look and feel very similar to our current customers. It's a diversity of age groups, of income levels, of ethnicities. It's kind of a mirror image of the customers that are in the store already. In terms of the initiatives, I suppose that was more of a conceptual response. If you think of we've got a list and we can break it into three buckets: merchandising, stores, and marketing.
But there are others too, right? HR, supply chain. There's a million things going on and some things we've tried and they've worked. Michael a few minutes ago mentioned the test-and-learn capability that the company has. So there'll be something that we'll say occasionally, this is a great idea. Let's just roll it out. Oftentimes we'll say, this is an idea that might work. Let's put it in 200 stores. And that team within this test-and-learn—essentially a department here of extremely talented and smart people—will come back four weeks, six weeks, eight weeks later: this is what we're seeing.
And if we feel good about the return, we'll expand it. If it's a no-brainer, we'll put it in all stores. If we want to learn a little bit more, we'll expand it to half the chain. So it would be hard for us to say, go to the store at 12:29 and you'll see everything, because every store is a little different. There are different sizes, they're in different types of shopping centers, et cetera. So all the initiatives that we're rolling out kind of behave a little bit differently depending on the store, the store location, the merchandise category that we might be talking about if we are doing something from a merchandising standpoint.
So it is not easy to say, here is the new store prototype that has every bell and whistle and you will see all the new marketing and all the new brands. It's not like that. It's a series of things that are all ramping up over time.
UNKNOWN Analyst
Okay, well that was great color. Thank you so much. Best of luck.
Jim Conroy, Chief Executive Officer
You're welcome. Thank you.
OPERATOR
Your next question comes from Anisha Sherman with Bernstein. Please take your question.
Anisha Sherman, Analyst at Bernstein
Thank you so much. So I want to ask about your strategy of increasing in-store inventories. We're seeing some signs of a weaker U.S. consumer across the board. How do you think about the risk to a higher inventory strategy if we do see some softening in the consumer trend and perhaps if you start to see a slowdown in turns? And then a quick follow-up, Jim, on your comment just now around new customers being very similar demographically as your current ones, when you look at customer surveys or performance by store, do you believe there's some share shift going on within off-price or do you believe these new customers are entering the off-price space from mainstream retail? Thank you.
Michael Hartshorn (Group President and Chief Operating Officer)
Aneesha, on inventory, you are right. I mean, we did carry higher store-level inventory during the quarter partly to support the stronger consumer demand. Despite that higher level of inventory, our in-store turns remained very strong. And at the same time, we delivered higher merchandise margins with the inventory levels. Our clearance levels have historically been low. They remained low for us. I mean, the key for us is to maintain flexibility in the open-to-buy, and we'll always be positioned to take advantage of closeouts in the marketplace, or if there's a pullback, we'll have some flexibility to adjust the inventory levels.
Jim Conroy, Chief Executive Officer
Yes, I agree with Michael on that point. And we've seen merchandise margin increase in each of the last two quarters. So I don't really ascribe any real risk to our inventory position right now. From a share shift within off-price, I suppose there's two ways to respond. The first way—trying to not be immodest at all—just mathematically, over the last four quarters we've grown stronger than each of the other two players. So mathematically we've captured more share.
So, of the off-price retail market, we're a bigger piece than we were a year ago because we've outgrown them. In terms of is our business uniquely impacting one or both of the other off-pricers? I don't think we can comment on that. They're both very formidable companies. They're both extremely well run. We're all competing against each other, but we're also capturing share from a whole bunch of other places in the retail industry. So to some degree we want off-price to win and we just want to be a slightly bigger winner.
So I couldn't comment on whether we're specifically impacting either of the two players, one of which is much bigger than us and does a truly world-class job. So I'm not terribly worried about that.
Anisha Sherman, Analyst at Bernstein
Okay, thank you so much.
Jim Conroy, Chief Executive Officer
Of course.
OPERATOR
Your next question comes from Maurani Shapiro with Retail Tracker. Please state your question.
Maurani Shapiro, Analyst at Retail Tracker
Hey guys, right in under the wire. Congratulations. So I had a couple quick ones. I've been very impressed with your Instagram, by the way, and I think it's a lot of fun and it's young. Do you have any data showing that it is driving in the younger consumer? I think we could assume it, but I'm curious if you have any data. And are you going to increase your spend in marketing in the back half and into '27?
Jim Conroy, Chief Executive Officer
So on the data front, as you can imagine, we are constantly pouring through data. We have a pretty strong indication that our marketing efforts, both the creative and how we mix the media, are driving traffic, including younger customers. I sometimes pause because I think people often draw too direct of a line between you run a post or post a reel and the next day sales go up. And I think we're trying to build a bridge of a kind. In terms of marketing spend, as our business continues to grow, we plan our marketing as a rate of sales.
So we'll get some increased spend in the back half because we had planned the business to be bigger than it was last year in the back half. In terms of rate of sales, we might see some slight escalation there, but, you know, we'll see how it goes.
Maurani Shapiro, Analyst at Retail Tracker
Great. And then just one follow-up, you mentioned FIFA. We're now back to school. I'm curious if the team is leaning a little bit more or plans to lean a little bit more into these holidays and events. It seems that that's when the shopper is coming out across all income levels, but definitely more so in the last couple years. And I'm curious, it's not just back to school but Halloween, Valentine's Day, graduation, Mother's Day, all the events during the year.
Is there a change of thinking there?
Jim Conroy, Chief Executive Officer
I guess I agree. The concept of event-driven in-store selling I think has existed now for a couple of years. I think we have done a pretty good job. I know each of the chief merchants are trying to further hone that ability to—I wouldn't call it a sharp change in our strategy or direction—maybe just doubling down a little bit on each of the events. But we've had the good fortune—I was just looking in preparation for this call at weekly comps—and they're pretty consistent.
It's not like we're comping massively around an event and then falling off and then catching it all back up at the next event. It'll be interesting with a later, potentially a later back-to-school season. A few people call that out. Labor Day has shifted, if back to school extends longer or comes later. But I think we've somewhat strongly hinted that our business right now is pretty strong also.
Maurani Shapiro, Analyst at Retail Tracker
So you're not seeing kind of the ups and downs between the holidays that some other retailers might see, or not to the extent that you need to call it out, I guess.
Jim Conroy, Chief Executive Officer
I'll tell you this. I looked at the last four weeks in July, and they were almost exactly the same number for four weeks in a row. Now, there's not a lot of massive events in July. Maybe at the end of the month we started getting into back to school, but we are not seeing comps build massively around Mother's Day, Father's Day—Father's Day shifted—and then fall back to low single digits and then come back up to mid-teens. It's just not operating like that on a year over year.
While the volume might change during an event week, the year-over-year comp that we're seeing has been pretty darn consistent each week.
Maurani Shapiro, Analyst at Retail Tracker
Well, that's great. Stable and boring is a good thing. Congratulations. Best of luck for the rest of back to school.
Jim Conroy, Chief Executive Officer
Thank you very much. I appreciate it.
OPERATOR
And our final question for the day comes from Bob Durbal with BTIG. Please take your question.
Bob Durbal, Analyst at BTIG
Hi, thanks for taking the question. I guess two questions, if I could. I guess the first one is, when you think about the new vendor adds and what's happening in the business, is your mix of good, better, best shifting dramatically over historical years of the company? I guess the second question, I'd just love to hear your take on the DD's business, where you feel that is and the opportunity that you're seeing, especially as it relates to the performance at the Ross division.
Jim Conroy, Chief Executive Officer
The quick answer on the price point good, better, best is we're not seeing a massive shift there. In fact, we're sort of planfully trying to maintain that good price point because that's kind of our bread and butter. We recognize that the environment that we're in right now, a lot of retailers are under pressure. A lot of discount retailers are under pressure. And it would sort of be a foolhardy strategy to take this moment in time to elevate the assortment and bring our price points up in a meaningful way.
DD's is in a great spot. I mean, we talk about good, better, best within Ross. DD's sort of tucks in beneath those price points. And we don't split them out specifically, but they had a very strong quarter as well. On a one-year basis, not quite as strong as Ross, but on a two-year basis, almost exactly in line with Ross. So Karen and Ken Margulies and those folks are doing a really good job running that business. So we absolutely want new and better brands, national brands, at all price points.
Sometimes they shade higher, but not all the time. And we're very, very cognizant to make sure that we're not overshooting our customer, particularly in the current environment.
Bob Durbal, Analyst at BTIG
Great. Thank you.
Jim Conroy, Chief Executive Officer
Thank you.
OPERATOR
Thank you. I'll now hand it over to Jim Conroy for closing remarks.
Jim Conroy, Chief Executive Officer
Very good. Well, thank you everyone for joining us today and we look forward to speaking with you on our next earnings call. Take care.
OPERATOR
Thank you. And this concludes today's conference. All parties may disconnect. Have a good day.
Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.
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