ROST — Q2 2026 Financial Report Analysis

Headline

Ross Stores' second quarter of fiscal 2026 (the 13 weeks from May 3 to August 1, 2026) was its strongest in years on sales: revenue up 13% to $6.26 billion and comparable store sales up 10%, driven mainly by more customers coming through the door. Reported diluted EPS (earnings per share — profit divided by the number of shares) jumped 71% to $2.66, but about $0.60 of that came from a one-time refund of tariffs the company had already paid. Even excluding the refund, EPS of roughly $2.06 was well above the company's own guidance of $1.85–$1.93, and management raised its outlook for the rest of the year.

Key figures

Operating margin is the share of sales left after paying for merchandise, stores and overhead, before interest and tax. Comparable store sales measure sales growth only at stores open for at least 14 full months, so they show how existing stores are doing rather than growth from new openings.

The tariff refund, and what's left without it

In February 2026 the U.S. Supreme Court ruled that tariffs imposed from 2025 under the International Emergency Economic Powers Act (IEEPA) were not authorized. Ross filed refund claims and, in this quarter, booked a benefit of about $253 million as a reduction in cost of goods sold, with substantially all of it already received in cash by August 1.

That one item accounts for 405 basis points (4.05 percentage points) of the 610-basis-point rise in operating margin, and about $0.60 of EPS. The comparison is also flattered from the other side: last year's Q2 carried about $0.11 per share of tariff-related costs. Stripping out the refund, operating margin was about 13.6%, up 205 basis points — still well ahead of the 130–150 basis-point improvement management had planned.

The underlying margin gain came from specific places, per the 10-Q:

• Merchandise margin up 110 basis points — the markup on goods sold, net of markdowns.
• Distribution costs down 100 basis points, mainly from the timing of packaway costs (packaway is merchandise bought opportunistically and warehoused to sell later), higher productivity, and the absence of last year's tariff-related processing costs.
• Occupancy leveraged 25 basis points — rent grew slower than sales.
• Partly offset by higher domestic freight (10 basis points, from higher fuel prices), higher buying costs (5 basis points, from incentive pay) and SG&A (selling, general and administrative costs) up 15 basis points as a share of sales, mainly from higher incentive pay.

What drove sales

• The 10% comp gain broke down into about 7% more transactions and about 3% bigger baskets (average spend per visit) — traffic-led growth, which is generally a healthier signal than growth from higher prices alone. Management said it came from both new customers and more engagement from existing ones, and credited merchandise, marketing and in-store improvements.
• Of the $736 million increase in sales, $534 million came from comparable stores and $202 million from newer stores.
• Home (accents, bed and bath) rose to 24% of sales from 23%; men's slipped to 16% from 17%; other categories held steady.
• For the first half (February 1 to August 1, 2026), sales rose 17% to $12.28 billion on a 13% comp, and EPS rose 55% to $4.69 (including the same $0.60 refund).

Cash, stores and balance sheet

• First-half operating cash flow rose to $1.71 billion from $1.08 billion, which the company attributes to higher earnings and higher incentive-pay accruals.
• Ross repurchased 1.4 million shares for $319 million in the quarter and says it remains on track for $1.275 billion of buybacks in fiscal 2026. Diluted share count fell about 3% year over year. It repaid $500 million of maturing notes in April; long-term debt (including the current portion) is now about $1.0 billion, against $4.29 billion of cash.
• Inventory rose 18.4% to $3.09 billion, faster than 13% sales growth. The ratio of accounts payable to inventory was unchanged at 85%, and packaway fell to 36% of inventory from 38% a year ago, so a larger share of the stock is merchandise headed to stores rather than held in warehouses.
• Ross opened 47 stores in the quarter (35 Ross, 12 dd's DISCOUNTS), plans 51 more in Q3, and raised its fiscal 2026 plan to about 115 openings (about 90 Ross and 25 dd's).

Takeaway: Headline EPS growth of 71% is inflated by a one-time $0.60 tariff refund, but the business underneath is genuinely stronger: a traffic-led 10% comp and a 205-basis-point underlying margin gain pushed earnings well past the company's own guidance before the refund was counted.

Outlook

Management raised second-half guidance despite what it called "significantly more challenging year-over-year comparisons":

Our read: the guidance implies comp growth slowing from 10% to mid-single digits, which management frames as the effect of tougher comparisons rather than weaker demand. The refund inflates fiscal 2026 EPS and will make fiscal 2027 comparisons look worse by about $0.60 per share, so the underlying margin trend (the roughly 205-basis-point gain this quarter) is the number to track. The two things to watch are the 18% inventory build — manageable if fall sales land near guidance, but a source of markdowns if they don't — and whether the traffic gains carry into the holiday quarter against tougher comparisons.