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Earnings Preview: Is the Retail Sector Poised for a Solid Quarter?

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December 28, 2016
Stock market forecast for retail industry.

The economic arrows are pointing up: consumer confidence hit a nine-year peak in November, according to the Conference Board. Monthly job growth is steady at about 175,000 monthly hires and wage gains are rising at about a 2.8% annual clip.

Normally, those would be the bedrock of a solid quarter of consumer spending in the retail sector during a crucial period. But will the retail sector reap the rewards of those gains when Q4 results are turned in?

The short answer appears to be “kind of.” The early results of the holiday-shopping period, the most important season for retailers—some of whom generate as much as 20% of their annual revenues during the typical six-week cycle—were bursting in some pockets; somewhat empty in others.

On a quarterly basis, sector sales and profits look to be on the rise from the year-ago results, according to a number of analysts. Consumer traffic during the discount-bait Thanksgiving weekend—we’re talking magnets like Black Friday and Cyber Monday here—was better, but sales weren’t, according to the National Retail Federation. Some 154 million shoppers hit the stores and online markets over the four-day stretch, up from 151 million last year. But consumers weren’t spending as much, averaging $289.19, down a bit from $299.60 last year, NRF reported. Much of that might be attributed to deep discounts, which retailers vowed to be aggressive about despite the pinch to their profits.

That prompted some analysts to pull down their holiday expectations, which have a heavy impact on Q4 sales. BTIG Research, for example, sees holiday same-store sales, a key measure of industry growth, to inch up 1.7% rather than the initial expectation of 2%. The NRF held on to its healthy 3.6 % year-over-year holiday total sales growth estimates, and analysts reporting to Thomson Reuters are forecasting profits to climb 1.2% on a year-over-year basis.

Where’s the Meat?

The sources of that growth are spotty, as the sector is a diverse group, and investors may find the Q4 results in a similar speckled pattern, according to analysts and industry experts. Some retailers may turn in super results; others not so much. That’s not to be unexpected considering the mixed bag of merchants selling retail products that range from home-improvement gadgets to high-end jewelry to athletic socks. 

Some unlikely winners from the holidays that may translate into strong Q4 results, according to analysts, are do-it-yourself home-improvement chains like Home Depot (HD) and Lowe’s (LOW). Typically, those types of retailers see a little bump from the holiday season, but generally nothing like those who sell apparel, electronics or jewelry.

But after Black Friday and Cyber Monday’s results rolled in, analysts say they were pleasantly surprised at how many consumers flocked to the discounts HD and LOW’s were offering, giving their Q4s some oomph. Much of that was toward price cuts on big appliances, which also helped propel sales at Best Buy (BBY) and Sears (SHLD). Comparable-store sales at HD, for example, are forecast to climb 3%, according to analysts.  

On the apparel front, results are likely to be as varied as the contents in their stores. Under Armour (UA) and Nike (NKE), for example, appeared to do well in pre-holiday sales, but analysts worried that their expenses, particularly on UA’s endorsements, might weigh on profit margins. Other retailers such as Footlocker (FL), Urban Outfitters (URBN) and L Brands’ (LB) Victoria’s Secret unit are expected to post strong holiday-related sales gains in Q4.

Shopping from the Sofa, and Beyond the Doorbuster

Online sales appeared to take on a much greater role as holiday selling season progressed, according to Adobe Digital Insights. Much of that may have come from the large numbers of big-box and department-store retailers that turned up their online marketing machines to combat the world’s largest e-commerce site Amazon (AMZN).

Though online sales grew substantially, some major retailers seemed less worried about cannibalization this year than in past years. Target (TGT), Wal-Mart (WMT) and Macy’s (M), for instance, said sales at their brick-and-mortar stores managed to hold up better than last year, when online sales came at the expense of in-store sales. What most retailers have said they want is for consumers to come in to a store or shop online for one item, but walk away with more. That followed traditional consumer-buying patterns this year in some stores.

"So far, the most encouraging trend we are seeing is that while doorbusters continue to be important," Brian Cornell, chief executive at TGT, told the Wall Street Journal, "once guests are there, they are shopping multiple categories." 

For the online-only retail sources AMZN and Alibaba (BABA), coaxing shoppers to cross multiple categories is part of their business plans. Q4 may be a boon if the early holiday results were any indication. AMZN said it had its “best-ever holiday shopping weekend,” with hot sales for Amazon devices like Echo Dot and Fire Tablet as well as toys, technology and small appliances.  

On the high-end jewelry side, Tiffany’s (TIF) same-store sales in the most recent quarter were short of expectations, but the baubles seller reported robust overall results in Q3. It also has indicated that it anticipates a solid Q4, thanks partially to better-than-expected results out of Europe.

TD Ameritrade clients can get a visual view of the financial sector via a heat map in the thinkorswim® platform. (See figure 1 below.) The size of the square indicates the market cap of that company. With just a click, you can quickly access fundamentals, news, charts and more. 

Retail Heat Map, Dec 2016

FIGURE 1: RETAIL SECTOR HEAT MAP.

To find this Heat Map in the platform, click MarketWatch > Visualize > Indices > S&P 500 > Consumer Discretionary. Image source: the TD Ameritrade thinkorswim platformFor illustrative purposes only. Past performance does not guarantee future results.