Ross Stores (ROST) FY2025 — Grade A: Zero Goodwill, Off-Price Retail Machine

Grade: A — Strong Financial Health

Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles

Data: SEC EDGAR 10-K (fiscal year ended January 31, 2026) + Yahoo Finance

Auditor: Deloitte & Touche LLP — Clean (unqualified) opinion

One-line verdict: Ross Stores passes with one minor watch item. The screening engine had limited data availability (10 of 18 checks returned N/A due to data gaps in yfinance for ROST's fiscal year timing), but every check that completed passed cleanly except C4 (watch — cash covers 83% of debt). The underlying business is strong: fiscal 2025 sales grew 8% to $22.75B, comparable store sales rose 5%, net income hit $2.15B, and CFFO/NI was 1.20. Ross operates a pure-play off-price retail model with no goodwill, no acquisitions, and predictable cash generation. The tariff risk — more than half of goods sold originate from China — is the most material concern disclosed in the 10-K, and it already impacted fiscal 2025 earnings by approximately $0.16 per share.

The Off-Price Value Machine

The 10-K reports fiscal 2025 highlights: "Sales were $22,751 million... Comparable store sales increased 5%... Net income was $2,145 million... Diluted earnings per share were $6.61, compared to $6.32 in fiscal 2024." The 5% comp driven by "an approximate 3% increase in basket and 2% increase in traffic" — both levers are positive, which is the healthiest kind of comp growth.

Why Off-Price Retail Is Structurally Advantaged

Ross operates the largest U.S. off-price apparel and home fashion chain with 1,904 Ross Dress for Less stores and 363 dd's DISCOUNTS stores across 44 states. The 10-K describes the value proposition: "first-quality, in-season, brand name and designer apparel... at savings of 20% to 60% off department and specialty store regular prices every day."

The off-price model benefits from economic uncertainty — as the 10-K notes, "customers' focus on value and convenience supports opportunities to expand our reach." When consumers feel financially squeezed, they trade down from full-price retail to off-price. Ross's buying model also benefits from brand oversupply: when full-price retailers over-order, Ross buys the excess at deep discounts.

Cash Flow: Consistent and Well-Deployed

CFFO/NI of 1.20 in fiscal 2024 (the latest year with complete NI data) indicates cash-backed earnings. The slight dip in CFFO from $2.51B to $2.36B is not alarming — the company is investing in expansion (90 new stores in fiscal 2025, with 110 planned for 2026).

Capital Allocation

Ross returned cash to shareholders through buybacks while maintaining a moderate debt level. The 10-K notes: "The primary sources of funds for our business activities are cash flows from operations and short-term trade credit." Cash of $4.73B against total debt of $5.68B puts the coverage ratio at 83% — enough to trigger a watch but well within manageable territory.

Interest income actually exceeds interest expense: the 10-K shows "Interest income $173M" vs "Interest expense on long-term debt $49M" — Ross is a *net* interest earner, which is unusual. The company holds substantial cash balances that generate meaningful income.

The 18-Point Screening

Revenue Quality

AR declining while revenue grows is a positive signal — the company is collecting faster, not slower.

Expense Quality

The 10-K provides detailed margin decomposition: cost of goods sold as a percentage of sales increased 10 basis points, "primarily due to a 25 basis point increase in distribution costs mainly due to the deleveraging effect from the opening of our eighth distribution center in Buckeye, Arizona" and "merchandise margin decreased 20 basis points primarily due to tariff-related costs." These were partially offset by "lower domestic freight costs of 20 basis points" and "lower buying costs of 10 basis points."

SG&A increased 25 basis points year-over-year, but the 10-K explains this was "primarily due to the gain recognized from this sale in fiscal 2024" — a $61.6M one-time gain on the sale of a packaway warehouse facility in the prior year, creating a tough comparison.

Cash Flow Quality

The C4 watch is mild. Ross carries $5.7B in long-term senior notes at fixed rates (ranging from 0.875% to 5.450% per the 10-K exhibit list). With $4.7B in cash and $2.4B+ in annual CFFO, the debt is comfortably covered. The company is a net interest earner.

Balance Sheet

Zero goodwill is notable. Ross has grown entirely organically — 2,267 stores built one at a time, never through acquisition. This eliminates the risk of write-downs from overpaid acquisitions.

M&A Risk

Beneish M-Score

Key Risks (from 10-K Item 1A)

1. China Tariff Exposure — The Biggest Risk on the Page

This is the most material risk for ROST. The 10-K is blunt: "more than half of the goods we sell originate from China." While Ross "directly imports only a small portion" of its merchandise — most comes through domestic suppliers — the underlying cost structure is heavily exposed to U.S.-China trade policy. The 10-K warns of "increased tariffs on goods imported into the United States, in particular on goods produced in China" creating risks of "disruption and significant cost increases in our established patterns for sourcing."

The impact is already showing: fiscal 2025 earnings included "an estimated unfavorable tariff-related impact of approximately $0.16 per share." If tariffs escalate further, Ross's merchandise margin — already compressed 20 basis points from tariff costs — could face more significant pressure.

2. Competitive Pressure and E-Commerce

The 10-K warns: "The retail industry is highly competitive and the marketplace is fragmented... There are limited economic barriers for others to enter the off-price retail sector." While Ross's business is exclusively brick-and-mortar, "consumer e-commerce spending continues to increase." The company also flags risks from AI and emerging technologies: "if competitors successfully implement these capabilities more quickly or effectively than we do, our competitive position could be adversely affected."

3. Macroeconomic Consumer Sensitivity

Despite the off-price value proposition, Ross acknowledges vulnerability to consumer spending pressures: "Elevated inflation, rapidly changing and increased tariffs on goods imported into the United States, other government regulation or policy changes, geopolitical conflicts... could reduce demand for our merchandise." The 10-K specifically flags "elevated consumer costs of living for other goods and services (including increased fuel and energy costs, food prices, interest rates, and housing costs)" as factors that impact customer spending.

4. New Market Execution Risk

Ross entered Puerto Rico and the New York Metro area in fiscal 2025 and plans to accelerate dd's DISCOUNTS growth (25 new stores planned for 2026). Expanding into new geographic markets carries execution risk — different customer demographics, competitive dynamics, and real estate economics.

Summary

Grade: A. Clean across all completed checks, one minor watch.

The screening engine was handicapped by limited yfinance data for ROST (fiscal year ending January 31 creates timing mismatches), resulting in 10 N/A results. But every check that ran passed cleanly. The auditor (Deloitte & Touche) issued a clean opinion with no critical audit matters flagged. No goodwill, no acquisitions, no material estimation uncertainties beyond standard retail accruals.

The real risk for Ross is external, not internal: China tariff exposure. More than half the merchandise originates from China, and tariff costs already hit fiscal 2025 earnings. The 10-K's risk factor disclosure on this topic is among the most prominent we have seen in retail. If U.S.-China trade tensions escalate further, Ross's cost structure and merchandise availability could face meaningful disruption. That said, this is an industry-wide risk, and Ross's off-price buying model gives it more sourcing flexibility than full-price competitors.

From an earnings quality perspective, Ross Stores is clean. The books are straightforward, cash flow backs earnings, and the balance sheet carries no acquisition-related landmines.

**Disclaimer**: This report is based on Ross Stores' 10-K (fiscal year ended January 31, 2026, SEC EDGAR) and public financial data. This is NOT investment advice.

Data: SEC EDGAR 10-K + Yahoo Finance

Auditor: Deloitte & Touche LLP (unqualified opinion)