# How Ross Stores makes money

CXProWealth Business Lens · Ross Stores (ROST) · Q2 FY2027

Read from the 10-Q for the period 2026-05-03 to 2026-08-01, filed 2026-09-01 with the SEC (accession 0000745732-26-000041): https://www.sec.gov/Archives/edgar/data/745732/000074573226000041/

Business Lens explains how a company earns, spends and keeps its money, from its own filings. It is insight and context, never a view on the shares, a target, or advice. Figures are raw units as filed; percentages are percentage points.

## Headline figures

- Revenue: $6.3B (+25.7% on the year)
- Operating income: $1.1B (operating margin 17.6%)
- Net income: $851.3M (net margin 13.6%)
- Gross margin: 33.8%
- Free cash flow: $624.5M (10.0% of revenue)
- Cash conversion (operating cash flow / net income): 1.03x
- Capital expenditure: 4.0% of revenue

## Where the money goes (Q2 FY2027)

- Sales → Cost of goods sold: $4.1B
- Sales → Gross profit: $2.1B
- Gross profit → Selling, general and administrative: $1.0B
- Gross profit → Operating income: $1.1B
- Operating income → Earnings before taxes: $1.1B
- Interest income, net → Earnings before taxes: $31.1M
- Earnings before taxes → Provision for taxes on earnings: $283.5M
- Earnings before taxes → Net earnings: $851.3M

## Income statement, as filed

| Line | Q2 FY2027 | Of revenue |
|---|---:|---:|
| Sales | $6.3B | 100% |
| Cost of goods sold | $4.1B | 66.2% |
| Selling, general and administrative | $1.0B | 16.2% |
| **Operating income** | $1.1B | 17.6% |
| Interest income, net | ($31.1M) | 0.5% |
| **Earnings before taxes** | $1.1B | 18.1% |
| Provision for taxes on earnings | $283.5M | 4.5% |
| **Net earnings** | $851.3M | 13.6% |
| Basic (in dollars per share) | $3 | 0.0% |
| Diluted (in dollars per share) | $3 | 0.0% |
| Basic (in shares) | 317,687,000 |  |
| Diluted (in shares) | 319,450,000 |  |

## History

| Period | Revenue | Operating income | Net income | Operating cash flow | Capital expenditure | Free cash flow |
|---|---:|---:|---:|---:|---:|---:|
| FY2009 | $6.5B | — | $305.4M | $583.4M | $224.4M | $359.0M |
| FY2010 | $7.2B | — | $442.8M | $888.4M | $158.5M | $729.9M |
| FY2011 | $7.9B | — | $554.8M | $673.1M | $198.7M | $474.4M |
| FY2012 | $8.6B | — | $657.2M | $820.1M | $416.3M | $403.8M |
| FY2013 | $9.7B | — | $786.8M | $979.6M | $424.4M | $555.2M |
| FY2014 | $10.2B | — | $837.3M | $1.0B | $550.5M | $471.5M |
| FY2015 | $11.0B | — | $924.7M | $1.4B | $646.7M | $726.2M |
| FY2016 | $11.9B | — | $1.0B | $1.3B | $367.0M | $959.3M |
| FY2017 | $12.9B | — | $1.1B | $1.6B | $297.9M | $1.3B |
| FY2018 | $14.1B | — | $1.4B | $1.7B | $371.4M | $1.3B |
| FY2019 | $15.0B | — | $1.6B | $2.1B | $413.9M | $1.7B |
| FY2020 | $16.0B | — | $1.7B | $2.2B | $555.5M | $1.6B |
| FY2021 | $12.5B | — | $85.4M | $2.2B | $405.4M | $1.8B |
| FY2022 | $18.9B | — | $1.7B | $1.7B | $557.8M | $1.2B |
| FY2023 | $18.7B | $2.0B | $1.5B | $1.7B | $654.1M | $1.0B |
| FY2024 | $20.4B | $2.3B | $1.9B | $2.5B | $762.8M | $1.8B |
| FY2025 | $21.1B | $2.6B | $2.1B | $2.4B | $720.1M | $1.6B |
| FY2026 | $22.8B | $2.7B | $2.1B | $3.0B | $819.3M | $2.2B |

Latest trend (the newest full year against the year before; a reading, not a forecast):

- Revenue: +7.7% (year before +3.7%): accelerating
- Operating income: +4.7% (year before +12.0%): slowing
- Net income: +2.6% (year before +11.5%): slowing
- Free cash flow: +34.9% (year before -6.6%): accelerating

## Operating figures stated in the filing

- Ross Dress for Less stores: 1,952 stores (as of 2026-08-01). "Ross is the largest off-price apparel and home fashion chain in the United States, with 1,952 locations in 44 states, the District of Columbia, Guam, and Puerto Rico as of August 1, 2026." (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF)
- Ross Dress for Less stores: 1,873 stores (as of 2025-08-02). "Total Ross Dress for Less stores end of period 1,952 1,873 1,952 1,873" (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF)
- dd’s DISCOUNTS stores: 376 stores (as of 2026-08-01). "We also operate 376 dd's DISCOUNTS stores in 23 states as of August 1, 2026" (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF)
- dd’s DISCOUNTS stores: 360 stores (as of 2025-08-02). "Total dd's DISCOUNTS stores end of period 376 360 376 360" (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF)
- Total stores: 2,328 stores (as of 2026-08-01). "Total stores end of period 2,328 2,233 2,328 2,233" (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF)
- Total stores: 2,233 stores (as of 2025-08-02). "Total stores end of period 2,328 2,233 2,328 2,233" (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF)
- Comparable store sales growth: 10.0% (as of 2026-08-01). "Comparable store sales increased 10%." (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF)
- Comparable store sales growth: 2.0% (as of 2025-08-02). "Comparable store sales growth 10 % 2 % 13 % 1 %" (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF)
- Traffic (transactions) growth: 7.0% (as of 2026-08-01). "The 10% increase in comp store sales was primarily driven by an approximately 7% increase in traffic and 3% increase in basket." (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF)
- Basket (average transaction value) growth: 3.0% (as of 2026-08-01). "The 10% increase in comp store sales was primarily driven by an approximately 7% increase in traffic and 3% increase in basket." (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF)
- New stores opened in the quarter: 47 stores (as of 2026-08-01). "We opened 47 new stores in the second quarter of fiscal 2026, consisting of 35 Ross stores and 12 dd's DISCOUNTS stores." (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF)
- Packaway share of total inventory: 36.0% (as of 2026-08-01). "As of August 1, 2026, January 31, 2026, and August 2, 2025 packaway inventory was 36%, 37%, and 38% of total inventory, respectively." (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF)
- Packaway share of total inventory: 38.0% (as of 2025-08-02). "As of August 1, 2026, January 31, 2026, and August 2, 2025 packaway inventory was 36%, 37%, and 38% of total inventory, respectively." (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF)
- Accounts payable leverage: 85.0% (as of 2026-08-01). "Accounts payable leverage was 85% as of August 1, 2026 and August 2, 2025." (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF)

## Key insights

### A tariff refund did most of the margin's work

Operating margin reached 17.6% against 11.5% a year earlier, and the filing names refunded tariffs as the primary reason, a recovery of past costs.

Cost of goods sold fell to 66.2% of sales, 6.22 points lower than a year earlier, and gross profit rose 38.8% while sales rose 13.3%. The filing names the primary reason. After the Supreme Court ruled in February that tariffs imposed under the International Emergency Economic Powers Act were not authorized, Ross claimed refunds of tariffs it had paid and recognized the recovery in cost of goods sold this quarter, with substantially all of it received by quarter end. _(from the filing)_
The business added to the gain on its own account. The filing credits a higher merchandise margin, lower distribution costs from the timing of packaway carrying costs and higher productivity, and occupancy leverage on higher sales. Higher freight from fuel prices and higher incentive pay for buyers partly offset them, and selling, general and administrative costs grew 14.3%, slightly faster than sales, to 16.2% of sales. _(from the filing)_
For comparison, operating income was 11.9% of revenue in the latest full fiscal year, $2.71B on $22.75B, and 11.5% of sales in the same quarter a year earlier. This quarter's 17.6% stands well above both, and operating income rose 72.9% on sales up 13.3%. _(from the filing)_
Our reading: because the refund recovers costs paid in earlier periods, it is not a run rate, and the jump in operating income overstates how fast the business's underlying earning power grew. What matters for later quarters is how much of the gain the filing credits to merchandise margin, distribution and occupancy holds once the refund is gone. _(analysis)_

### More visits, not higher prices, drove sales growth

Comparable store sales rose 10%, mainly from about 7% more transactions and a 3% larger basket, after growing just 2% a year earlier.

Comparable store sales measure stores open long enough to compare with a full prior period. The filing says their 10% rise was "primarily driven by an approximately 7% increase in traffic and 3% increase in basket," where traffic is the number of transactions and basket the average transaction value. In the same quarter a year earlier, comparable sales grew 2%. _(from the filing)_
Total sales rose 13.3%, to $6.26B from $5.53B, while the store count rose 4.3%, to 2,328 from 2,233. The filing attributes most of the sales increase to comparable stores, with the rest from stores too new to count as comparable. _(from the filing)_
Our reading: visit-led growth is the sturdier kind for an off-price chain, because it reflects shoppers coming back for a changing assortment rather than paying more per item. The filing does not say where the extra visits came from, so whether they reflect shoppers trading down from pricier stores or regular customers visiting more often cannot be told from the numbers alone. _(analysis)_

### Free cash flow grew even as store spending jumped

Capital spending rose 24.6% to $251.3M as stores opened, yet free cash flow climbed 33.8% to $624.5M, or 10.0% of sales.

Operating cash flow in the quarter was $875.8M, against $668.4M a year earlier, and capital spending was $251.3M against $201.7M. That left free cash flow of $624.5M, 10.0% of sales, compared with $466.6M, or 8.4% of sales, in the same quarter a year earlier. Capital spending was 4.0% of sales. _(from the filing)_
The filing attributes higher investing outflows primarily to opening new stores. Ross opened 47 stores in the quarter, has raised its opening plan for the year, and lists construction of its next distribution centers among its planned capital spending. _(from the filing)_
Caveat: the filing says substantially all of the tariff refund was received by quarter end, so it lifts this quarter's operating cash flow as well as its earnings. Over the latest full fiscal year, capital spending was $819.3M on revenue of $22.75B, or 3.6%, a steadier measure of what the expansion costs. _(from the filing)_

### Competitive edge

- **Suppliers fund most of the stock on the shelves** Accounts payable equal 85% of inventory, as a year earlier, so vendors finance most stock and earnings arrive as cash 1.03 times over.
- **Packaway lets buying follow deals, not the season** Packaway, goods bought now and stored for later, was 36% of inventory against 38% a year earlier, letting buyers act when surplus appears.

### What to watch

- **Tariffs turned from a cost into a refund** Tariff costs weighed on the quarter a year earlier and refunds lifted this one; the filing still lists tariff increases among its risks.
- **Full-year net margin sits below its earlier level** Across the eight-year history revenue rose to $22.75B from $14.98B, but net earnings only to $2.15B from $1.59B, leaving a thinner net margin.
- **Labor costs are already visible in the numbers** Selling, general and administrative costs grew 14.3% against sales up 13.3%, and the filing points to higher incentive compensation.

## Investor view

**Ross's operating margin reached 17.6%, lifted mostly by a refund of tariffs the Supreme Court ruled unauthorized**

### How it makes money

Ross Stores runs two off-price chains, Ross Dress for Less and dd's DISCOUNTS, selling what the filing calls "first-quality, in-season, brand name and designer apparel" and home goods below department and specialty store regular prices. It ended the quarter with 2,328 stores: 1,952 Ross and 376 dd's DISCOUNTS. All of its operations are, in the filing's words, "off-price retailing in stores throughout the United States and its territories." _(from the filing)_
The model is a spread between buying and selling. Sales of $6.26B against cost of goods sold of $4.15B left gross profit of $2.12B, a 33.8% gross margin. Ross books buying, freight, distribution and store occupancy inside cost of goods sold, so that line carries most of the supply chain and rent bill. Selling, general and administrative costs, mainly store payroll and advertising, took another $1.02B, or 16.2% of sales, leaving operating income of $1.10B. _(from the filing)_
Sales grow two ways. Comparable store sales, from stores open at least fourteen complete months, rose 10%, which the filing says was "primarily driven by an approximately 7% increase in traffic and 3% increase in basket." The rest came from stores too new to count as comparable. Ross opened 47 stores in the quarter, and the count rose to 2,328 from 2,233 a year earlier. _(from the filing)_
The business turns profit into cash with little capital. Operating cash flow in the quarter was $875.8M against net earnings of $851.3M, and after capital spending of $251.3M, free cash flow was $624.5M, or 10.0% of sales. The filing names "cash flows from operations and short-term trade credit" as its primary sources of funds, and accounts payable leverage, which compares what Ross owes suppliers with the inventory it holds, was 85%. _(from the filing)_

### What shifted

Operating income rose 72.9% to $1.10B from $638.3M, far faster than sales at 13.3%. The filing attributes much of the jump to one item. After the Supreme Court ruled in February that tariffs imposed under the International Emergency Economic Powers Act were not authorized, Ross filed refund claims and recognized the benefit in cost of goods sold this quarter, with substantially all of it received by quarter end. _(from the filing)_
Cost of goods sold fell to 66.2% of sales, 6.22 points lower than a year earlier, and the filing names the tariff recovery as the primary reason. The rest came from the business itself: a higher merchandise margin, lower distribution costs from the timing of packaway carrying costs and higher productivity, and occupancy leverage on higher sales, partly offset by higher freight from fuel prices and higher incentive pay for buyers. _(from the filing)_
Sales growth came from customers, not from the refund. Comparable store sales grew 10% against 2% in the same quarter a year earlier, and traffic, the number of transactions, did most of the work. Selling, general and administrative costs grew 14.3%, slightly faster than sales, and rose 0.15 points to 16.2% of sales; the filing points to higher incentive compensation. _(from the filing)_
Below operating income, the tax provision rose to 25.0% of pre-tax earnings from 24.2%, and net earnings rose 67.6% to $851.3M. Diluted earnings per share rose further, to $2.66 from $1.56, because the diluted share count fell to 319.5 million from 324.8 million, which the filing attributes largely to stock repurchases. _(from the filing)_

### Risks in the filing

Supply of goods: the filing names Ross's dependence on "the market availability, quantity, and quality of attractive brand name merchandise at desirable discounts," and on its buyers' ability to source enough of it to offer a wide assortment at competitive prices. _(from the filing)_
Trade and costs: tariff increases, or threats of them, on apparel, home goods and shoes made in other countries; inflation and fuel costs that hit both shoppers' confidence and spending and Ross's own costs; unseasonable weather that shifts demand for seasonal goods; and the broader risks of importing merchandise. _(from the filing)_
Growth and execution: the company says it needs to expand in existing markets, enter new ones and find acceptable sites with favorable demographics, and to attract and keep staff despite labor shortages, turnover and rising labor costs. It also says it must manage inventories, markdowns and inventory shortage to reach its planned gross margins. _(from the filing)_
Operations and legal exposure: disruptions to the supply chain or information systems, cyberattacks on payment and customer data, a disaster in a region where stores, offices or a distribution center are concentrated, and pending class and representative actions, primarily in California, alleging violations of wage and hour laws. _(from the filing)_
Two of these already show in the numbers. Tariffs moved earnings in both directions within a year: a cost in last year's quarter and a refund in this one. And labor cost pressure is visible in the filing's own explanation of this quarter: higher incentive compensation raised both buying costs and selling, general and administrative expense. _(analysis)_

## Founder view: mechanisms

### Buying other companies' surplus

An off-price retailer earns its margin by buying cheaply rather than by charging a premium. Ross's buyers purchase brand-name goods that manufacturers and other retailers overproduced, cancelled or could not sell, and resell them below the original retail price. Packaway, inventory bought now and held in warehouses for later release, lets the company take a good deal even when the stores do not need the goods yet, so supply rather than the season sets the timing of purchases. _(analysis)_

### Suppliers fund the inventory

Ross sells goods at the register, usually before it has paid the supplier for them. The filing calls short-term trade credit a significant source of financing for merchandise inventory, which means growth in stock is largely funded by the vendors Ross buys from. Earnings turn into cash almost one for one, and the company can open stores, pay dividends and repurchase shares from operating cash rather than borrowing. _(analysis)_

### A changing assortment pulls visits

Because Ross buys whatever deals the market offers, its shelves keep changing and no two visits are the same. That turns shopping into a hunt: customers return often because the find they missed last week may be gone next week. Growth comes from how often people come, not from raising prices, and the hunt happens in the aisle, since the filing describes the business as retailing in stores. _(analysis)_

### A low-cost store, opened in volume

Ross grows by repeating one simple store format, under two banners aimed at different budgets. The filing says it chooses sites on market penetration, demographics, competition, expected profitability and how well a new store spreads overhead. Each new store adds sales against buying, distribution and head-office costs that grow more slowly, so expansion widens the margin as long as new stores reach the productivity of the old ones. _(analysis)_

## Member research

Signed-in members read, on the page: what Ross Stores's numbers depend on from here, and the playbook behind each mechanism (what needs scale, what transfers, how to test it, the metric that would show it).

## Sources

- Ross Stores 10-Q for the period to 2026-08-01: https://www.sec.gov/Archives/edgar/data/745732/000074573226000041/ (2026-09-01)

Methodology business-lens-1.0 · schema 1.2.0 · run business-lens-2026-11-02 · as of 2026-11-02