Can Ross Stores Be the Safety Cushion In Retail Stocks?

Key Points

• Ross Stores' stock is falling after earnings, but investors need to know if this is due to a company-specific issue or a broader market selloff. 
• The company's figures reflect a much better than anticipated quarter, where management guides more optimism ahead. 
• Ross has the ability to cushion tariffs today, which is why the stock might end up swinging back after all.

A new economic regime is hitting the stock market’s future like never before. With the developing trade tariffs rolled out by President Trump recently, economists and analysts are now scrambling to find a path forward when it comes to growth and activity, not to mention margins and earnings for companies exposed to the new costs that will come about from tariffs in the coming months and quarters.

Specifically, those who are underweight in the retail sector should start looking for some exposure during this uncertainty, as volatility often serves as a two-edged sword of risk and opportunity. With this in mind, investors must also be aware that not all retail stocks are treated equally (nor should they) as their exposure to tariffed countries varies, though overall, the market has been discounting them all the same.

The most recent stock to fall victim to the new tariff world in the retail space was Ross Stores Inc. NASDAQ: ROST. This brand is known for its affordability, which is always an attractive proposition during times of inflation and uncertainty, such as today’s economy.

However, in its most recent quarterly earnings figures, the stock has sold off as if to say the results weren’t all that great. Here’s why that might not be the case.

Unfortunate Timing for Ross Earnings

The same morning that Ross Stores reported its quarterly earnings results, President Trump also announced that he would impose a 50% tariff on the European Union, sending the S&P 500 index lower by about 1.5% in the pre-market hours.

Whether the 12.5% decline in Ross Stores stock has to do more with this broader market sell-off or its quarterly figures is up for debate, but investors can at least attribute a decent portion of the move to the wider market’s decline. However, that remains speculation, so investors would be better off digging deeper into what happened.

As it turns out, Ross Stores is still part of the beaten-down retail sector, but the numbers and guidance provided by management would suggest otherwise.

What Numbers Actually Matter for Ross Stores Shareholders?

Starting with the most common indicator, sales, investors can see that Ross Stores reported flat sales growth compared to last year, much better than the declining figures reported by peers in the space. However, sales won’t tell investors how the company expects to weather these higher costs and uncertainty.

There is a much more powerful metric that can answer that concern and justify a swift recovery in the stock price as one of the safest in the retail sector today.

According to the earnings press release, because Ross only imports a small portion of its merchandise, it can afford to have more wiggle room in marking up its items.

Surely, more than half of the products they sell originate from China, but the first-hand chains will have to absorb these tariffs. If volume declines for those, Ross might be able to acquire inventory from them at a discount, born from the need to liquidate in time.

This might explain why management has guided for 3% to 4% comparable sales growth for the second quarter of this year and why the company decided to boost its store count by 3.6% over the year to signal potential new demand coming ahead under this inflationary tariff dynamic.

Despite concerns about the consumer budget, Ross Stores still reported a net operating cash flow of up to $409.7 million for the quarter, a net jump of 11% from last year’s reported $368.9 million.

Now, how can a company report better cash flows during a quarter full of uncertainty and tariff volatility?

That’s where ROST stock’s safety comes into play.

A Good Hedge at This Price?

Even at 83% of its 52-week high, Ross Stores stock seems to have a fantastic risk-to-reward ratio for buyers today, where some (if not all) potential downside could already be priced in. 

Now, building on the attractive operating cash flow growth, management has a trick up its sleeve to save the company from tariff increases.

Ross Stores generated up to 17.6% in returns on invested capital (ROIC), meaning they have ample room to absorb some of the tariff costs and remain the low-cost retail offer for consumers worried about price spikes elsewhere.

ROIC also matters because it’s what allows companies to compound on their own value and provide shareholder benefits.

Benefits such as the intended $1 billion worth of stock repurchases Ross Stores has announced for 2025 will definitely cushion the stock's recovery during dips like this week's.