Ross Stores Inc (ROST) — Q4 2026 Earnings Call Transcript

Thank you, John, 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 I review our performance for the quarter and the year, I wanted to acknowledge all of the associates throughout the Ross organization. The results we achieved in 2025 are a direct reflection of your dedication and hard work throughout the year. The strong collaboration across the company in all functional areas was essential to our success. I want to thank all of you for your great work. Now, turning to our quarterly results. As noted in today's press release, we are pleased to report that our business momentum accelerated further in the fourth quarter, with both sales and earnings significantly surpassing our expectations. Throughout the holiday season, we delivered compelling merchandise assortments to our stores, benefited from higher customer engagement through our new marketing campaigns and executed in-store initiatives that enhance the customer experience. These efforts, combined with healthy growth in new stores, contributed to a 12% growth in total sales for the quarter. Turning to comparable store sales growth, we delivered a robust 9% increase despite a 1 percentage point erosion in comps from weather, primarily the January storms that impacted many parts of the country. We were quite pleased with the health of the comp growth as it was driven mainly by an increase in transactions and customers with a modest increase in basket. We saw broad-based strength across both departments and geographies. Every major merchandise category showed solid positive sales growth with shoes and cosmetics performing the best. Similarly, every region of the country was positive, with the Midwest and Mountain regions being the strongest. dd's DISCOUNTS also posted healthy sales gains as the chain value and passion offerings continue to resonate with shoppers. Similar to Ross, the growth was broad-based across both merchandise categories and regions. Moving to inventory, consolidated inventories were up 8% and packaway represented 37% of total inventory compared with 41% last year. We are pleased with our inventory position at year-end. Regarding our store expansion program, 2025 is an exciting year of continued growth as we expanded into new markets while deepening our footprint in existing ones. During the year, we added 80 new Ross Dress for Less stores and 10 dd's DISCOUNTS stores. Importantly, we expanded into several new markets for Ross, including our first stores in the New York Metro area and Puerto Rico. Inclusive of 9 closures, we ended the year with 2,267 stores, consisting of 1,904 Ross Dress for Less and 363 dd's DISCOUNTS locations. Before I turn the call over to Bill, I'd like to briefly review initiatives underway that position us well for incremental sales and profit growth as we enter 2026. First, with merchandising. We are pleased with the strength of our assortments across the store, where we have delivered more brands at the right value for our customers. Our buying organization has done an incredible job navigating through tariffs and strengthening our vendor relationships to deliver merchandise that is resonating with our customers. It is encouraging to see the strength in the Ladies business as well as the solid growth and continued sequential improvement with our home category, which faced heavy pressure from tariffs throughout the year. Looking forward, we are pleased with our inventory levels and are seeing ample availability in the marketplace to support our business trend going forward. On the marketing front, we are pleased with our holiday campaign as we continue to refine our brand messaging and believe it is connecting with today's shopper. We are encouraged by the higher levels of customer awareness and engagement we are seeing. We are also quite pleased with the increase in customer traffic and believe that this positions us well for continued growth as we look ahead. In our stores, we have made meaningful merchandising and operational improvements which we believe also contributed to the outsized sales growth. The stores team did a great job of managing the holiday surge in the business. Additionally, the supply chain organization executed extremely well during the peak season, which enabled us to drive exceptional sales growth through fresh receipts and fast turning inventory. Overall, we are encouraged by the positive impact these initiatives have had on our recent performance, and we see opportunities to build on these learnings to support our growth plans in 2026 and beyond. As we enter the new year, we are seeing a very strong start to the first quarter, which gives us confidence that our focus on improving our connection with the customer is taking hold. Turning to store expansion, many of the changes we implemented that helped drive comp store sales growth also had a positive impact on new store productivity, which further bolsters our confidence in accelerating our store opening plans going forward. As a result, we are planning to open 110 new locations this year, which represents 5% growth. Part of that growth reflects the reacceleration of dd's DISCOUNTS with plans to open 25 stores in 2026. For Ross, we see an opportunity to open 85 new stores this year, slightly above last year. As we continue to identify attractive real estate opportunities across our markets, we remain confident in the long-term potential to grow Ross and dd's chains to 2,900 and 700 stores, respectively, and expand our reach to even more customers over time. Now Bill will provide further details on our fourth quarter and fiscal year results and additional color on our outlook for fiscal 2026.

Thank you, Jim. Turning to our financial results. Starting with the fourth quarter, total sales for the quarter grew 12% to $6.6 billion. Comparable store sales grew a robust 9% primarily driven by an increase in the number of transactions. Fourth quarter 2025 operating margin was 12.3% compared to last year's 12.4%, which included a 105 basis point benefit from the sale of a packaway facility. Excluding the benefit last year, operating margin increased 95 basis points. Cost of goods sold was 65 basis points lower in the quarter. Occupancy leveraged by 30 basis points on strong sales results, while distribution and domestic freight costs declined by 20 and 15 basis points, respectively. Merchandise margin improved by 10 basis points. Partially offsetting these benefits were buying costs that rose by 10 basis points mainly due to higher incentives given the earnings outperformance. SG&A for the period rose 75 basis points, primarily due to last year's packaway facility sale. Excluding the sale, SG&A was 30 basis points lower. Fourth quarter net income was $646 million, and earnings per share for the fourth quarter was $2. This compares to net income of $587 million and $1.79 in earnings per share in the prior year, which included the previously mentioned benefit of approximately $0.14 per share related to the sale of a packaway facility. Excluding the benefit, earnings per share for the quarter grew 21%. Now turning to results for the full year, total sales for the year increased 8% to a record $22.8 billion, up from $21.1 billion last year. Comparable store sales grew 5% on top of a solid 3% gain in fiscal 2024. Net income for fiscal 2025 was $2.1 billion, similar to last year. Earnings per share were $6.61, up from $6.32 in the prior year. Excluding the previously mentioned $0.14 gain from the facility sale last year and the approximate $0.16 per share impact from tariff-related costs this year, earnings per share grew 10%. Now to our shareholder return activity. As noted in today's release, we repurchased 1.5 million shares during the quarter, completing the 2-year $2.1 billion program announced in March 2024, in line with our plans. Our Board of Directors recently approved a new 2-year $2.55 billion stock repurchase authorization or approximately $1.275 billion each year for fiscal years 2026 and 2027. This new plan represents a 21% increase over the recently completed repurchase program. In addition, the Board also approved a 10% increase in our quarterly cash dividend to $0.445 per share. The increase to our stock repurchase and dividend programs reflect our continued commitment to return excess cash to our shareholders after funding growth and other capital needs of our business. Now let's discuss our outlook for fiscal 2026, starting with the first quarter. As Jim noted earlier, we ended the quarter with solid momentum. And while early, we are encouraged by the continued strength in the business as the spring season begins. As a result, we are projecting comparable store sales for the 13 weeks ending May 2, 2026, to be up 7% to 8% and earnings per share of $1.60 to $1.67. The operating statement assumptions that support our first quarter guidance include total sales are projected to increase 10% to 12% versus last year. If same-store sales perform in line with our forecast, operating margin for the first quarter is expected to be in the range of 11.8% to 12.1% compared to 12.2% last year. The expected decrease reflects higher distribution center costs from the opening of a new distribution center in the second quarter of last year and unfavorable timing of packaway-related expenses. In addition, we project higher incentive costs versus 2025 when we underperformed our plan. Partially offsetting these higher costs is our expectation of an increase in merchandise margin. We plan to add 17 new stores, consisting of 13 Ross and 4 dd's DISCOUNTS during the period. Net interest income is estimated to be $27 million. Our tax rate is expected to be approximately 23% to 24%, and weighted average diluted shares outstanding are forecasted to be about 322 million. Turning to our full year guidance assumptions for 2026, for the 52 weeks ended January 30, 2027, we are forecasting same-store sales to be up 3% to 4%, and earnings per share to be $7.02 to $7.36 compared to $6.61 for fiscal 2025. Total sales are projected to be up 5% to 7% for the year. If same-store sales performed in line with our forecast, operating margin for the full year is expected to be in the range of 12% to 12.3% compared to 11.9% in 2025. This plan reflects higher merchandise margin and lower distribution costs for the year. As Jim mentioned earlier, we expect to grow our store base by 5%, reflecting approximately 110 new locations comprised of about 85 Ross and 25 dd's DISCOUNTS. These openings do not include our plans to close or relocate about 10 to 15 older stores. Net interest income is estimated to be $92 million. Depreciation and amortization expense inclusive of stock-based amortization is forecasted to be about $740 million for the year. The tax rate is projected to be about 24% to 25%, and weighted average diluted shares outstanding are expected to be about 319 million. In addition, capital expenditures for 2026 are projected to be approximately $1.1 billion. There are several key investments included in our 2026 plans. First, as previously mentioned, we are reaccelerating our store opening plans. At dd's, we are opening 25 stores this year compared to 10 last year. In addition, we plan to open 85 new Ross stores this year compared to 80 last year. Next, we plan to make further investments in our supply chain, including the continued buildout of our next distribution center as well as the initial outlay for another DC. Lastly, we are investing in our existing store base to drive an improved customer experience. Now, I will turn the call back to Jim for closing comments.

Thank you, Bill. As I reflect on my first year as CEO, I'm extremely grateful for the support and dedication of the entire team. The year had its early challenges with tariffs and uncertainty in the macro environment, but we remain resilient and focused on executing our strategies. Looking ahead, we are optimistic about the strength of our business and the initiatives planned for 2026. At this point, we would like to open the call and respond to any questions that you might have. John?

Congrats on a great quarter. So Jim, could you elaborate on the inflection to 8% traffic-led comps in the back half of the year? Or I guess, how would you bridge the more than 600 basis points of comp improvements relative to low single digits over the last 4 quarters? And on the 7% to 8% comp guide, you know I had to ask you on this. I mean this comes from a conservative company and a conservative guy historically. Could you elaborate on the further improvement you saw to start the quarter, maybe confirm the moderation that you're embedding for the remainder of the quarter. And did you embed any potential lift from tax refunds or stimulus during the quarter?

Sure. I'm glad to address both of those questions. Regarding the inflection point, it was widespread across nearly all product categories and regions. You were referring to the improvement from the first half to the second half of the year. In evaluating the second half overall, many positive developments are coming together. We've discussed the Ladies business in previous calls. In Q3, we acknowledged that the Ladies business regained strength and performed slightly better than the company average. In Q4, this category remained robust, aligning more closely with the overall business performance. The Men's segment also continues to show strength, particularly in the center core of our stores, which includes cosmetics and shoes—both of which demonstrated significant growth in Q3 and Q4, showing consistent improvement throughout the year. Additionally, I want to highlight the home business and the efforts of Gurmeet and the team. At the start of the year, the home segment faced challenges due to tariffs, but they have successfully turned that situation around. In our last call, we specifically noted the importance of toys, and we concluded the holiday quarter with strong sales in that category. Regarding the comp guidance, I would refer to Bill or Michael; however, I want to emphasize that we are pleased with a 7% to 8% comp guide, but we have maintained our conservative approach. We are not presenting a high forecast simply for attention; we feel confident in this guidance. If either of you want to add anything, feel free.

No. Matt, I would say, one, it is a reflection of the initiatives we have in place and the momentum we have coming out of the fourth quarter, the merchants did a tremendous job transitioning into the first quarter that we can see in the business. We're in the inverse position we were last year where we started off very, very weak. So we feel good about how we started the year. You had a question on tax refunds. We haven't built anything in for the tax refunds. It's still early. Obviously, in the tax refund season, the significant refunds just began to flow last week. And from what we can see from the treasury, they're up about 7% thus far. But with roughly 2/3 of the refunds left to come, we'll have to wait and see the impact over the entire quarter.

And then just one follow-up, Jim, on new stores, productivity that you're seeing in the Northeast, how does that inform your opportunity to expand the unit growth opportunity over time?

Matt, it's Michael again. We wouldn't get into the specifics of the Northeast other than it's been very strong and it gives us a lot of confidence that we can grow there. I would say, but not only in the Northeast and you can see it in the difference between comp and total sales growth. We had one of our best years in a while in terms of new store productivity, which also gives us confidence that we can grow in our existing markets.

It's Tracy Kogan, filling in for Paul. I had two questions. The first is on your merchandise margin improvements in 4Q, how much of it was driven by better IMU from buying better versus how much was driven by lower markdowns? And what are you expecting in F '26? And then I have a follow-up.

For the merchandise margin, that 10 basis points improvement, I think we feel good about it. It was driven mostly by better buying and our merchants just making good decisions as they always do around how to deliver value at the same time flowing some benefit through to us.

And on '26, it's again, it's mainly driven by the better buying. To some extent, we get some benefit from recapturing some of the tariff pressure early in the year.

Great. And then on the flow-through in 1Q, I know you mentioned higher incentive comp and timing of packaway. Can you size either of those headwinds and which one is bigger?

Could you repeat the question for me one more time?

Yes, sure. I think on the 7% to 8% comp, we would have expected maybe more flow-through to the EPS line. And I think you mentioned that you had a higher incentive comp in there as well as timing of packaway. And I was just wondering if you could frame how big either of those are in terms of basis points of pressure for the quarter.

Tracy, it's Michael. As you can see on the full year guidance, at a 3% to 4% comp, we leveraged EBIT by 10 to 30. So that's actually above what our normal kind of long-range algorithm, always timing quarter-to-quarter. In the first quarter, we have a couple of things driving the deleverage. The first of which is we haven't yet lapped the distribution center opening from last year. So we'll begin to lap that in the second quarter, but that has a bigger impact in the first quarter. Number two, we have built into our forecast, let's see how it plays out, some pressure on the packaway impact, the packaway expense. And then finally, we had a pretty disappointing first quarter for us last year, which means the incentive comp base will be lower from last year, but pressure this year. Among those, they're pretty evenly split.

What are the key factors driving the acceleration in the ladies business? And what's your outlook for the category as we move through the year?

The acceleration in the ladies business is rooted back with the brand strategy. The company had put that in place maybe 2 years ago now, and that team has really done a great job of resetting that vendor base and the assortment there, finding a really nice balance of bringing in branded bargains across good, better and best. We've seen some nice strength in the Juniors business specifically. So that's been a part of the growth there. In terms of the outlook going forward, right now, a lot of things are performing quite well. And I would imagine we're going to see continued strength in that business going forward, certainly in the first half of 2026. Did I get all of your questions there, Lorraine?

Yes. It seems like you brought more inventory into the stores during the holiday season. Is this a change in strategy? And would you expect to move more from the distribution centers into the stores as you did for the 4Q?

Lorraine, on inventory, we did mention in our remarks that inventory grew 8%. Obviously, that's 1 point in the quarter, but that's lower than our overall sales growth. We did see opportunities to increase our inventory position in front of the customer. And we believe that supported our growth and ability to chase sales in Q4 while also better transitioning into Q1, all of that while maintaining solid margins and inventory turns. So I think we do have more opportunity, but we feel good about the levels coming into the first quarter.

Jim, you talked a lot about the changes made in marketing and social media campaigns have been highly successful. I guess I'm curious how you continue to evolve the marketing strategy in '26? And do you expect marketing expenses as a percentage of sales to start to move higher over the next couple of years? Or do they stay consistent?

We're really pleased with the marketing team, the new campaigns, and the agency that was established at the beginning of 2025. Their work began to show results, particularly for back-to-school. The changes in marketing were one of several factors that contributed to a positive turning point for the business. Along with in-store changes and great assortments, these elements combined to create a strong Q3 and Q4. Regarding marketing spend, while we've received questions about increasing our investment in marketing, we are satisfied with the results from Q3 and Q4. Our marketing spend has remained consistent with sales rates, and we see potential for slight increases in the future. However, we don't believe major investments in new marketing are necessary to drive traffic since demand generation is currently very strong.

That's great. And then just to double click on the second part of your answer on the store experience. Can you dive in there? What's worked? What can you expand? How much is left on the opportunity set within the storage themselves? Because clearly, NSP, to your point earlier, was very strong for the second quarter in a row along with a good comp.

It's Michael. On the store front, similar to marketing, we haven't made major investments there. But we do have a pretty strong test and learn capability in our store organization. And what we did during the back half of the year is we targeted payroll investments to improve both store recovery and registered throughput, really focusing on high-volume activity in the store. And we clearly saw some early successes that we can build on those learnings in 2026. The other thing that you'll see in '26, as we've discussed in the past, we've been piloting self-checkout actually for some time now, and we plan to expand to more stores given the positive results we've seen thus far.

Jim, I wanted to follow up on your marketing comments. As you assess the higher piece of traffic that's coming into the store, are you seeing any shifts in the age or household income demographic of your customer base? Is this a reactivation of lapsed customers? Or are these new younger customers coming into the store that can repeat?

It's a great question. Starting at the top side, we're very encouraged that we are seeing nice customer count growth, right? And it's hard to determine sometimes whether that's a 'brand new customer' or a lapsed customer returning, but it's really exciting for us to have comp sales growth driven not only by transactions, but by customers finding Ross and we're really investing in the Ross brand. In terms of how those customers split by income and age, et cetera, once you push down to that level, the data becomes a little bit more complicated to read. We're very comfortable saying that we've seen growth very broad-based across income demographics, age demographics, including 18- to 34-year-old customers. We're pleased with our Juniors business. We're pleased with our young men's business. So we feel good about the younger portion of the customer base, but overall, we're just quite encouraged to start to see some really nice acceleration in customer count.

And then as a follow-up, can you share your latest view on the earnings algorithm for Ross on a multiyear basis? Is there anything that's structural preventing you from returning to a 14% operating margin over time?

Sure, Brooke. The algorithm hasn't changed significantly. We expect new store growth to be at 5%, which indicates that we can continue to grow both banners over time. Productivity, as Jim mentioned, has improved, and for this year, we anticipate about 70% to 75% of new store productivity relative to an average store. This translates to a 3% to 4% growth. Historically, we've indicated that the EBIT margin will leverage between 3 to 4. Occupancy costs are around 4%, SG&A is 3% to 4%, and stock repurchase accounts for about 2%. This all leads to a long-term earnings growth of approximately 8% to 10%.

Great quarter. So first quarter has been a source of underperformance on a multiyear basis. You thought there was an opportunity to maybe come out of the holiday, Jim, and transition to a little more aggressively into the transition inventory. Can you help us understand within the context of the 7% to 8% comp then with the margins compressing on some of the biggest comps. Can you just walk us through, is there something unique in the first quarter that you're kind of going forward to get to that 7% to 8% comp that isn't as much of an opportunity as you get out to the rest of the year? And is it something that you have to invest in to get there as we look at the margin? And then on the margins, if I look at 2025, that's coming in at 11.9% for the year, excluding tariffs, that was probably in the low 12s. This year, you're guiding 12.1% to 12.3% on the best comp guidance we've seen in a while and that's lapping some of the duplicative executive costs, the distribution center costs that wrap around for just 1 quarter, and then there's some reticketing last year. Can you just talk about what's conservative there if there's a change to the long-term language of 15 basis points of expansion above the 2 to 3 points of comp or anything like that we should think about?

I'm glad to explain this. I would distinguish the EBIT margin in the first quarter from the comparison because there are specific factors at play. We haven't yet lapped the distribution center, we are experiencing packaway pressure in the first quarter, and we also had a poor start last year, which means we are starting from a lower incentive base. These are the main factors affecting EBIT margin in the first quarter. Regarding the guidance of 7% to 8%, it reflects the positive momentum from the fourth quarter, but we are also facing weak comparisons to last year and previous years. We believe that the initiatives we have implemented, including managing inventory levels, are positively influencing the first quarter and will continue to do so. As for the second half of the year, our earnings model remains unchanged: each point of comp above our guidance translates to an increase of about 10 to 15 basis points in EBIT margin.

And just to add, there's been questions for the last year about are we investing more in marketing or investing more in store labor as a rate of sales, both marketing and for labor are very much in line with last year. We don't intend to sort of buy the comp in Q1 or for the year going forward. I think Michael answered the flow-through question better than I could have. If and when we decide at some point to overinvest in part of the business, hoping for an ROI on it, we will signal that. But at the moment, we're getting some really nice growth without making artificial investments.

Could you expand on the higher new store productivity you're seeing? Is that a function of the markets you're entering that are perhaps higher rent, but structurally higher sales per square foot? Is it a reflection of the operational improvements you cited in the prepared remarks? Just what are the key factors there?

First, I'd say overall, it's not just the new markets. We're seeing it across the regions, even some of our tried and true regions in California, Florida, and Texas. And I think it is a reflection of some of the things we're doing in existing stores being more aggressive out of the gate in new stores and seeing it pay off. That said, to your point, we are entering more populated higher rent markets, and we're very pleased with our entry and are seeing great performance there.

And then following up on the branded strategy and the success in ladies apparel. Can you talk about the roadmap for replicating that success in other categories? What's the next area of focus?

Well, the brand strategy cuts across the whole store, it's probably most prominent within the ladies business. But as we talked a bit in the prepared remarks, the growth for the quarter, actually for each of the last few quarters was very broad-based. And as I look at comps by merchandise category between men's, ladies, kids, the whole center core set of businesses, cosmetics and shoes, all very strong. Home has really regained its ground. It's slightly comp eroding. But given where it started at the beginning of the year, it's very much in play for helping us drive a very strong fourth quarter comp. So it's not really a sequential rollout between Ladies and the other businesses. And I think it's kind of now in our DNA. Now we're just kind of looking forward as to how we grow our business going forward quarter-to-quarter. But again, nearly every piece of our business, actually, every major merchandising category was solidly positive with a very strong business in outerwear, which was a bigger business for us this quarter than it's been in the past. So it's very broad-based.

Really nice job. Jim, just following up on the last one. When thinking about the branded effort, any way to frame how AUR has been looking at a category level. So before accounting for any category shifts, just within the categories that you're working after, how AUR looks? And then, did you guys quantify the new store versus maintenance CapEx within next year's guide?

On the AUR piece, our AUR increase was pretty modest in the quarter. I think we've called out a modest increase in the basket, but most of the comp coming from transactions. The units per transaction were flattish versus last year. So you could surmise that AUR was just a modest increase as well. It was a little disproportionate to the part of the business that got hit hardest by tariffs, which was home. So home was up. The other businesses didn't see that much of an AUR increase. I think if we had a learning coming out of the quarter is that we probably have the ability to push for some either higher-priced goods or potentially taking some retails up. But what's made us successful for years and years is having the best bargains in retail and always maintaining our umbrella relative to mainstream retail. So we're going to focus on that for sure. But we probably have gained some confidence in shifting our assortment to, again, slightly higher-priced goods, new goods, not like-for-like in higher prices and maybe in certain targeted places, if we feel like we have merchandise categories that are margin eroding, increasing AUR a little bit to recapture some of that. So we feel just really well positioned as we start 2026. We're excited about the current growth, but there's seemingly another dozen levers that we can pull for additional growth going forward.

And then regarding capital, right, the best way to probably think about it for us is maybe think about 1/3 each for distribution centers and new stores and maybe 25% for store maintenance and the balance for technology enhancements to merchandising tools and initiatives and other things that are going to support long-term growth.

This is Juliana Duque, on for Ike. I wanted to ask if you've seen any changes in the type of consumer shopping you've been seeing across both the brands whether that's between the good, better, best towards branded or any other commentary to get there?

The quick answer, I would say is no. The composition of our customer base seems to be very much intact. We've seen growth across essentially all pieces of it in terms of income levels, age, different ethnicities. So to tease out any minor differences would be kind of unnecessary. It's been an overarching rising tide, I think, for essentially all customers.

Congratulations on the very nice results. As you talked about expanding dd's, I believe going from 10 new store openings in '25 to 25 in '26. Is it the same strategies that give you confidence in dd's and that you're seeing the results on? And is there any changes either to cost of stores, size of store in dd's that you're seeing? And the good, better, best strategy, how is it applied to dd's? And just lastly, new store openings cadence this year? How do they flow through? And what percentage of the stores will be in the Northeast this year?

Dana, on dd's, what really gives us confidence is the underlying merchandising strategies that we've been working on in the last couple of years and certainly the overall performance of dd's, which has, like Ross has had very, very strong trends. On the reacceleration, no change in store size. Like Ross, we're seeing very strong new store performance, which also gives us confidence. This year's new stores are primarily in some of their older markets. We were able to take advantage of some Rite Aid bankruptcy deal that helped shore up the pipeline for this year. In terms of cadence, I think it will be more weighted to the summer and fall opening groups. I think those are going to be pretty even with about, I think, we said 17 new stores in the first opening window.

I just want to follow up on Dana's comments on dd's. I was curious, did you see the same trends there as well? It was driven by traffic in our basket. And have you taken over the last year due to tariffs any price increases at dd's? And then just one last follow-up on dd's. Do you have much of a home business there compared to Ross? Or is it smaller?

On the trends for dd's, I'd say they're very similar for us, including basket and modest price increase.

And they have a very vibrant home business at dd's in line with the percent of total store that process. The categories are slightly different. The mix of categories within home are slightly different. But it's a very strong part of that business as well.

And I remember when you guys were first tinkering with dd's and over the years as you played with dd's, you've had a larger kids business. Is that still true? Or is it more balanced today? Is it more like Ross?

I'm not sure I know the answer to that off the top of my head, but they also have a decent kids business, and we tend to not want to disclose sort of with such specificity the size of each of our businesses.

Fair enough. Actually, don't disclose it, keep it to yourself. Thank you, guys. Best of luck in the first quarter. I rescind my question. No one needs to know the answers. Good luck with the first quarter.

Great quarter. So you talked about capturing additional market share. Jim, you used the word inflection that you saw during back-to-school. You're obviously guiding for a step down in comp in the second half. You're facing some tougher compares. Can you talk about how you're thinking about how sustainable this accelerated level of comp is? Do you see it as you lap a year and then you go back to algo? Or do you see this as more sustainable as you're winning over new customers who can be a more permanent fixture in the comp growth going forward?

I’ll give my perspective, and then my partner might provide a more cautious outlook. We had a strong third quarter and we're optimistic about the fourth quarter. We believe we’re entering Q4 with solid momentum and have set a reasonable forecast for Q1. This isn’t too ambitious considering the current state of the business. There are two views in retail: one perspective is that once you start comparing these numbers over two years, it's possible to achieve outstanding results on top of previous successes. While that’s sometimes true, it’s still early in March to predict what the latter half of the year will bring, and we have just shared our guidance. The other perspective suggests that we are attracting new customers to the brand, and our product selection and in-store experiences are converting them into regular shoppers. Our in-store experience has improved, leading to quicker returns and generating word-of-mouth referrals, which draws in even more customers. As comparable store sales increase, we tend to receive more marketing funds proportional to our sales, allowing us to invest more in our workforce, enhancing the look of our stores, and initiating a positive cycle. This is the mindset we are cultivating here—focusing on growth and ensuring all functional areas are aligned. As we consider the second half of the year, although we want to approach it cautiously, I see significant potential for us to continue growing the business substantially.

Helpful. Is it fair to say that your guidance encompasses the first school of thought where you're looking at the 2-year stacks or CAGRs and normalizing for that, but then you internally are pushing your bias to the second school of thought, where it's more sustainable?

Perhaps that's part of it. The other part is that it's just so early. We've had two good quarters, but the previous two quarters were not as strong. Clearly, there's a lot happening in the macro environment right now. We felt it would have been irresponsible to be more aggressive for the rest of the year. We believe this is one of the strongest full-year comparisons we've reported as a company in a while, which we thought should indicate positive momentum.

I want to ask about market share in a different way. Jim, do you think you're taking market share from other off-price retailers? Or do you think it's coming more from traditional retailers? How do you see that?

Well, it's a giant retail market out there, of course. And I think the bigger forfeiture of market share is coming from mainstream retail. One of our other off-price competitors just posted a very solid quarter as well and they're a bigger business than us. So it would be foolhardy to say we're taking a lot of share from them. I think the share shift is more from mainstream retail, department stores, and other places like that to off-price in general. And we would just like to get our fair share or of course, more than our fair share from that shift.

Congrats on a great quarter. You credited the branded strategy with sequential comp improvement. Can you just help contextualize for us how it's helping evolve your vendor base and strengthen the existing vendor relationships? And then secondly, when thinking about the new customer acquisition, just how do you see their behavior in terms of spend or frequency of trips among existing shoppers? Or just any early reads in terms of how you think about the stickiness of the newer customers that have been coming to you?

Yes. The branded strategy has been in place for some time, and we celebrated its anniversary a couple of quarters ago. The team, particularly in the Ladies section and likely across wholesale as well, has built strong momentum driven by the branded strategy. However, other parts of the business have undergone various changes in product assortment and a slight increase in inventory selection in stores. So, while the branded strategy contributes, the sequential improvement in comparable sales is broader, involving marketing changes, in-store merchandising, and operational enhancements to elevate the shopping experience. Customers are noticing tidier stores and a quicker shopping process. Regarding customer count and frequency, we currently lack sufficient data to determine if our existing shoppers are visiting more often, or if we're seeing new or returning customers. We do receive specific data about customer cards and numbers, but interpreting that information can be tricky. It’s challenging to know if the same customer is shopping with a different card or if they are new or returning customers. However, we are confident that we are seeing growth in customer count, which is encouraging for us. Did that address your question? We may have lost her. John, are you there?

Jim, you alluded to this thought that there was going to be this big or increase in marketing, increase in store investment and you're proving kind of comp acceleration with leverage if you look at kind of the fourth quarter. You mentioned some of the things that are blocking out the first quarter. But I'm curious on what the right way to think about marketing and store investment going forward. Is it that there's a more flexible nature of marketing, is there a more variable nature to marketing that you can kind of be more nimble in any given period and the store investment is just minute or simple in nature and kind of tails off or you'll be more focused on keeping it fresh go forward? Sort of what is the right way to think about this.

I'm happy to address that. I'm not sure what I said that led to that conclusion, as I believed I stated quite the opposite. We have not made significant investments in marketing or store labor, and we've achieved our comp growth within the limits of our operating model, particularly coming out of Q4, where we've seen nice leverage without those investments. Moving forward, we might experiment a bit, but still within the limits of our operating model, considering minor adjustments to marketing. We are continuously making targeted investments, as Michael often mentions about test and learn. If we make certain changes in-store with labor, whether it be adding hours or reallocating them, we will assess the impact on store appearance or how quickly we can move through the queue. We will continue to experiment. The key takeaway from this call is that we have experienced significant comp sales growth in Q3 and Q4 and our guidance for Q1 without unnecessary or artificial investment in marketing, store labor, or CapEx. We see potential levers to explore if we can identify a return on investment. Interestingly, on this call last year, we mentioned our goal to do all these things in a cost-neutral manner, and I believe we have accomplished that a year later. As I enter my second year, the team has come together well, and the two chief merchants who have been in their roles for a year are performing exceptionally well. We are progressively building momentum. Looking ahead to 2026, many more opportunities await. As Michael frequently reminds me, the best is yet to come.

So thank you, everyone, for joining us on today's call, and we look forward to speaking with you on our next earnings call. Take care.