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Earnings Preview: Retail Sector

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April 7, 2016
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It’s been a tough slog for the hypercompetitive retail sector, which has been dogged by the double whammy of cyclical disruptions and consumers who are socking more money away than spending it. Did we mention the wobbly economy too? How will the retail sector fare when Q1 earnings results hit the tape?

Expect a wide range of results that will be crammed with heavy declines, weighing the S&P 500 retail sector down again for the quarter, according to S&P Capital IQ. Retail earnings have been in a sequential decline since Q4 2014. Is it ending anytime soon? The sizable spread between S&P Capital’s calculations for the best-performing subindustry and the worst underscore the cyclical revolution of the industry and the whims of the consumers it serves. On the winning side is Internet retail, which has been growing in leaps and bounds at the expense of other subindustries like department stores.

“The Amazon effect is taking hold,” says S&P Capital analyst Tuna Amobi, referring to how the Internet is changing the business model for retailers. Couple that with consumers who are holding their pocketbook strings tight and the results speak for themselves. Consumer spending edged up a puny 0.1% in February for the third straight month, according to the Commerce Department. Meanwhile, the personal-savings rate matched its highest peak since the end of 2012 at 5.4%.

What Happened?

The better question might be what didn’t happen, and this year, it was winter. This unusually warm winter kept sales of winter gear and apparel at bay at a time on the retail calendar when sales are already in contraction mode after the boom of the holiday-shopping period, the industry’s most important months. The stronger dollar is also at play too, on both the top and bottom lines of retailer’s earnings reports.

The retail sector isn’t in this earnings pit alone. With all 10 sectors of the S&P 500 in the well, cumulative earnings are projected to dive 8.7% by FactSet Research’s calculations.

The Internet’s Gravitational Pull

This is the cyclical transformation that has retailers in every subindustry rethinking their game plans. As consumers increasingly opt for shopping from home and at nontraditional retailers in lieu of trekking out to shopping centers and malls, those bricks-and-mortar establishments are hurting. S&P Capital sees the Internet retail subindustry logging in a robust 119% earnings gain in the first quarter. Department-store earnings, meanwhile, are projected to plunge some 33%.

Look at the Q4 results to understand the impact: Amazon’s Q4 revenues jumped nearly 22% (though its earnings per share were well short of expectations) while Macy’s (M) dropped better than 5% and Wal-Mart’s slipped 1.5%. This spring, M is closing 36 stores and laying off 4,800 workers. Wal-Mart, which has been trimming staff at its corporate headquarters since last fall, shuttered 269 stores in January.

Other subindustries bracing for declines are computer and electronics retail, projected to fall 4.1% by S&P Capital, home-furnishing retail to slump 1.3% and apparel retail slipping 0.9%, though there are signs of improvement after two challenging years for some like American Eagle Outfitters (AEOS) and Abercrombie & Fitch (ANF). The subindustry is expected to turn the corner into positive territory in the Q2. Amobi credits a big chunk of that to the teen sector, which is finally looking up after consecutive quarters of decline. “Brands are working hard to refocus their fashion assortment for their fickle customers,” he says.

Among the gainers are specialty stores, thanks to the strength of brands like Kate Spade (KATE) and the so-called athleisure brands like Lululemon (LULU). S&P Capital sees a 25.2% improvement from specialty stores. Other brick and mortar stores performing well include Children’s Place (PLCE) and Urban Outfitters (URBN). Home-improvement is projected to lean to the upside, higher by 15.9%, with robust results from Home Depot (HD) and Lowe’s (LOW) in sight.

Want More Research?

It can be had on the TD Ameritrade thinkorswim® platform, with a lots of deep earnings information. Let’s take a look at an example of how to find this information with Wal-Mart (WMT). In the platform, type WMT in the symbol box and click Analyze > Fundamentals.

Here you’ll see that WMT offers an assortment of merchandise and services under its “everyday low prices” mission, what it refers to as EDLP. The company has three segments: Walmart U.S., Walmart International and Sam’s Club. There are Walmart stores in every state as well as the District of Columbia and Puerto Rico. Sam’s is membership only and also has stores in D.C. and Puerto Rico, but is in only 48 states.

In 2015, WMT reported full-year earnings of $4.57 a share, a 10.5% drop in profit from the year before. You’ll also find out that 2015 was a year full of declines in returns on equity and assets, gross profit margin and operating profit margins and met profit margin. Its gross profit margin inched up. This information will give you some insight into the challenges the company has been facing.

Want more? Scroll down to “What Drives the Stock” and see what Trefis, a third party Wall Street technology firm that produces forecasts based on complex analyses, has to say about future forecasts. 

wmt-fundamental-analysis

FIGURE 1: SMALLER FOOTPRINT, MORE PROFIT AT WAL-MART?

Trefis sees U.S. revenue per square foot growing while store sizes decrease. Data source: Trefis. Information/estimates provided by Insight Guru, a separate and unaffiliated firm. Stock prices are impacted by numerous factors and estimates of prices in the future are not guaranteed. Image source: the TD Ameritrade thinkorswim® platform. For illustrative purposes only.

Tune in this earnings season

Whether you’re bullish, bearish, a trader, or an investor, you can count on market analysis by JJ Kinahan this earnings season.

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