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Department Store Earnings On Display, And Macy’s Starts Parade With a Miss

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May 11, 2017

(Thursday Market Open) Department stores threw open their earnings showrooms today, and a miss by Macy’s (M) highlights some of the pressures these companies face.

M shares fell more than 7% in pre-market trading after the company reported earnings per share of 24 cents vs. Wall Street analysts’ estimates of 35 cents. Revenue also fell short. The mall retailer continues to struggle in a changing environment as same-store sales dropped 5.2% in Q1.

In other department store earnings news, Kohl’s (KSS) beat earnings estimates, but same-store sales fell more than analysts had anticipated and revenue came in below projections. Department stores continue to face major challenges from e-retailers, and it could be interesting to listen in to the companies’ earnings calls to get a better sense of how they plan to address this reality. They’re already closing stores, but what else do they have in mind? Nordstrom (JWN) reports after the close today, followed by J.C. Penney tomorrow morning.

In other earnings news, Snap (SNAP) missed analysts’ expectations and saw its shares dive in pre-market trading.

A few key earnings reports remain, with Target (TGT), Wal-Mart (WMT) and Deere (DE) next week. Of all the companies that reported to date, 72% beat Wall Street’s expectations, according to research firm CFRA. And companies aren’t just beating bottom-line estimates, but 64% have beaten on the top line as well. CFRA now projects earnings to grow 14.9% in Q1 and 7.1% in Q2. 

Despite the earnings extravaganza, technical barriers appear to remain a factor for the S&P 500 Index (SPX), which posted a record close yesterday but just missed closing above 2400. On the sector watch, energy led the way Wednesday with a better than 1% gain as oil rallied. U.S. weekly stockpiles came down appreciably (see below), providing some comfort to those who’d feared a demand decline. Real estate also posted decent gains, while health care and industrials lagged.

Retail sales tomorrow morning represent the next key event. This indicator has fallen for two straight months, but expectations run high for the April data. Wall Street analysts’ consensus is for a 0.6% rise, according to Briefing.com. The downturn last month was driven in part by weak automobile and gas station sales, but also by declines in furniture, garden equipment, and food services. In other words, it was pretty widespread.

Last week’s strong April employment report, along with the healthy earnings season, might be behind higher retail sales expectations. Remember, also, that despite the March weakness, retail sales have generally been a positive factor, up 5.2% over the last year. Producer prices rose 0.5% in April, the government said early Thursday, perhaps another sign of economic strength.

Oil climbed to nearly $48 a barrel early Thursday, bolstered in part by falling U.S. stockpiles. Asian and European stocks were mixed overnight, and gold and bond prices didn’t move much.

S&P 500

FIGURE 1: FLAT-LINING

The S&P 500 (SPX), plotted through Wednesday on the thinkorswim® platform from TD Ameritrade, seems to be flat-lining a bit here at near-record highs, unable for now to pierce the 2400 mark and close above that. Meanwhile, the Russell 2000 (RUT) index of small stocks, represented by the purple line, has run into resistance as well. Data source: Standard & Poor’s, FTSE Russell. For illustrative purposes only. Past performance does not guarantee future results.

Speedy Delivery: Internet shopping outlets have been lowering the cost of orders required for free shipping, with Amazon (AMZN) the latest to join the crowd. The battle between AMZN and Wal-Mart (WMT) for low shipping costs calls attention to WMT’s efforts to ramp up its online presence. The company reported 29% growth in e-commerce sales in fiscal Q4, and next week we’ll get a look at how that aspect of the company did in its fiscal Q1. Another thing to keep in mind: Low or free shipping costs from e-commerce companies reflects in part the current low cost of energy. Should crude oil prices start to rise and affect companies’ costs, it would be interesting to see if the e-commerce sector has to pull back on its cheap shipping.

Miles and Miles: Speaking of energy costs, yesterday’s drawdown in U.S. crude oil stocks and accompanying rise in oil prices serve as reminders that we’re entering the heart of so-called “driving season.” Demand for gasoline typically picks up this time of year, but gasoline stocks barely fell last week, perhaps a sign that drivers aren’t hitting the roads in more substantial numbers. On the other hand, total miles driven by Americans keep rising from the recession-era lows of 2009, according to research by the Federal Reserve Bank of St. Louis. The latest data show that 12-month U.S. vehicle mileage through February reached nearly 3.2 trillion, up from 2.9 trillion at the start of the decade and about twice the level of 35 years ago. It’s worth checking this rather obscure statistic now and then, because it tends to be a decent proxy of economic health.

Balance Beam: Remember that rates aren’t the only thing to watch at the Fed. There’s also the question of the Fed’s balance sheet and when the Fed might start winding it down. Once that gets going, it could lead to lower bond prices and higher interest rates, but the Fed hasn’t been too clear when it plans to move. Probably the next chance to hear more about that is next month at Fed Chair Janet Yellen’s post-meeting press conference.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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