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Exploring Weak Retail Sector Earnings and Guidance

·5 min read

The overall trend emerging from the Retail sector’s Q2 results has been on the weak side, with most operators suffering from softening sales, rising expenses, bigger than expected inventory builds and lowered guidance for the current period.

Multiple factors are at play here. Many companies experienced merchandising missteps and failed to accurately read evolving consumer behavior. On top of that, retailers came up short in responding to an admittedly tough operating environment characterized by rising costs.

The consumer is still healthy, supported by low debt loads, adequate savings and rising wages as a result of a tight labor market. But there is growing evidence that lower-income consumers are starting to feel the squeeze, with rampant inflation eating into, if not altogether offsetting, wage gains. It would make sense for such a consumer to spend less on discretionary items and more on everyday necessities.

As a result of these factors, a significantly smaller proportion of retailers have been able to beat consensus EPS estimates. Also, while Q3 estimates have been coming down for most sectors, the Retail sector is among those suffering a larger magnitude of negative revisions.

With respect to the Retail sector scorecard, we now have Q2 results from 32 of the 34 retailers in the S&P 500 index. Total earnings for these retailers are down -20.3% from the same period last year on +7.7% higher revenues, with 71.9% beating EPS estimates and 43.8% beating revenue estimates.

A big driver of the -20.3% earnings decline for the quarter is the drag from Amazon AMZN, whose Q2 earnings were down -86.5% from the year-earlier period. Excluding the Amazon drag, Q2 earnings for the remaining retailers would be down -3.4%.

The comparison charts below show the sector’s Q2 earnings and revenue growth rates, with and without Amazon.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

The comparison charts below show the sector’s Q2 EPS and revenue beats percentages relative to what we have been seeing from this group of companies in other recent periods.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

As you can see here, the Q2 revenue beats percentage of 43.8% is a new low for this group of 32 retailers over the last 5 years (the preceding 20 quarters).

Q2 Earnings Season Scorecard (as of August 26th, 2022)

For the 487 S&P 500 members that have reported Q2 results already, total earnings are up +6.9% on +14.3% higher revenues, with 77.2% beating EPS estimates and 68.8% beating revenue estimates.

Excluding the Finance sector drag, the Q2 earnings growth for the remainder of the index improves to +14.3% and declines to -3.6% on an ex-Energy basis.

As we have been pointing out all along, the Q2 EPS and revenue beats percentage has been on the lower side relative to other recent periods, though not as low as we saw with the Retail sector.

The reporting cycle is winding down, with this week bringing in results from over 100 companies, including 10 S&P 500 members. Notable companies reporting this week include Best Buy BBY, HP Inc. HPQ and Lululemon LULU.

Looking at Q2 as a whole, combining the bulk of the reported results with the few results still to come, total earnings are on track be up +6.8% on +14% higher revenues.

While the Q2 earnings growth rate isn’t much, the aggregate dollar total of quarterly earnings is on track to reach a new all-time quarterly record at $505.9 billion, spotlighting that inflation isn’t necessarily a negative for corporate earnings.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

The Current Earnings Backdrop

The chart below shows current expectations (and actuals) on a quarterly basis.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

As you can see above, earnings and revenues for the current period (2022 Q3) are currently expected to be up +1.8% and +9.1%, respectively.

The chart below shows how estimates for the current period evolved since the quarter got underway.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

Aggregate Q3 earnings estimates have declined -5.7% in the above time period (since mid-June), with 14 of the 16 Zacks sectors suffering negative revisions and two sectors enjoying positive revisions.

Estimates have come down the most for the Consumer Discretionary, Consumer Staples, Conglomerates, Technology and the Retail sectors. On the positive side, estimates have gone up for the Energy and Autos sectors.

The positive revisions trend for the Energy sector has been a persistent feature of the overall earnings picture in recent periods. In this respect, the Q3 revisions trend is consistent with what we had been seeing in other recent periods as well, with higher estimates for the Energy sector offsetting cuts elsewhere.

That said, Q3 estimates outside the Energy sector have dropped relatively more than what we saw ahead of the Q2 earnings season.

The chart below shows the 2022 Q3 revisions trend on an ex-Energy basis.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

The chart below presents the earnings picture on an annual basis.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

As we saw earlier in the context of estimate revisions for Q3, a similar downward adjustment is underway for the full-year estimates as well. But growth is still expected to be positive next year and the year after, hardly a recessionary outlook.

For a detailed look at the overall earnings picture, including expectations for the coming periods, please check out our weekly Earnings Trends report >>>>Making Sense of Fading Earnings Estimates 


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