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Retail Weakness & Consumer Spending

Sheraz Mian

Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>

Here are the key points:

  • The Q2 earnings season is effectively over, with results from 455 S&P 500 members already out. The Retail sector is the only one that has a sizable number of results still awaited.

 

  • The Macy’s disappointment is likely a sign of things to come from the department store space, which is dealing with a number of headwinds despite a still-healthy consumer spending environment. 

 

  • Total earnings for the 455 S&P 500 members that have reported Q2 results already are up +0.8% on +5.1% higher revenues, with 75.4% beating EPS estimates and 57.1% beating revenue estimates.

 

  • Q2 results have largely met expectations, with earnings growth on the weak side and positive EPS beats about in-line with historical trends. Revenue growth has been a lot better compared to earnings, but fewer companies are beating top-line estimates.

 

  • For the Technology sector, we now have Q2 results from 86.7% of the sector’s market cap in the index. Total earnings for these Tech companies are down -5.6% on +5.1% higher revenues, with 80.4% beating EPS estimates and 64.7% beating revenue estimates.

 

  • For the Finance sector (all results are in), total earnings are up +4.4% on +8.2% higher revenues, with 77.6% beating EPS estimates and 67.3% beating revenue estimates. The most notable part of Finance’s outperformance has been the favorable momentum on the revenue front.

 

  • Estimates for the current period (2019 Q3) have been steadily coming down, with total earnings for the period now expected to be down -4.1% on +4.3% higher revenues.

 

  • For the small-cap S&P 600 index, we now have Q2 results from 539 index members or 89.7% of the index’s total membership. Total earnings for these 539 companies are down -9.8% from the same period last year on +2.2% higher revenues, with 61.8% beating EPS estimates and 59.2% beating revenue estimates.

 

  • Earnings growth for the small-cap index is even weaker when looked at on an ex-Finance basis. The Finance sector, which accounts for almost one-third of the S&P 600 index total market capitalization, had +16.5% higher earnings in Q2 on +4.6% growth in revenues. Excluding Finance, Q2 earnings growth drops to a decline of -20.3% (-9.8% as a whole). 

 

  • Looking at the quarter as a whole for the small-cap index, total Q2 earnings are expected to be -11.5% below the year-earlier level on +3.7% higher revenues. Excluding the Finance sector, Q2 earnings decline would be -20.7%. 

 

  • For full-year 2019, total earnings for the S&P 500 index are now in negative territory, down -0.4% on +2.4% higher revenues. This would follow the +23.1% earnings growth on +9.2% higher revenues in 2018. Strong growth is expected to resume in 2020, with earnings expected to be up +10.3% that year.

 

  • The implied ‘EPS’ for the index, calculated using current 2019 P/E of 18.1X and index close, as of August 14th, is $162.06. Using the same methodology, the index ‘EPS’ works out to $178.71 for 2020 (P/E of 16.4X). The multiples for 2019 and 2020 have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year.

 

Macy’s (M) disappointingly kicked off the Q2 reporting cycle for the department store space, whose woes have only been compounded by the tariffs issue. The company missed estimates and guided lower, even though they acknowledged that overall trends in consumer spending remain favorable. Macy’s had to resort to significant discounting to clear an inventory overhang, which could very well be industry-wide issue as other department stores report results in the coming days.

We now have Q2 results from 21 of the 38 retailers in the S&P 500 companies. Total earnings for these 21 retailers are up +7.8% from the same period last year on +15.1% higher revenues, with 61.9% beating EPS estimates and 57.1% beating revenue estimates. The comparison charts below put these results in a historical context.

 

 

 

 

Please note that the Zacks Retail sector also includes the online vendors like Amazon (AMZN) and restaurant operators like McDonalds (MCD), in addition to the traditional brick-and-mortar operators. Most of the 21 retailers that have reported Q2 results already are either online vendors or restaurant operators, with Macy’s as the first major traditional retailer to come out with results.

We try to look at the sector’s aggregate growth picture on an ex-Amazon basis given the online retail giant’s growing heft. But that isn’t much of an issue in the Q2 numbers, as Amazon’s earnings were up only +3.6% in the period.

Q2 Earnings Season Scorecard (as of August 14th, 2019)

We now have Q2 results from 455 S&P 500 members that combined account for 91.5% of the index’s total market capitalization. Total earnings for these 455 index members are up +0.8% from the same period last year on +5.1% higher revenues, with 75.4% beating EPS estimates and 57.1% beating revenue estimates.

The comparison charts below put the results thus far in a historical context.

 

 

 

 

The earnings and revenue growth for these 455 index members is modestly above what we saw from this same sample of companies in the preceding period, but the growth pace is materially below what we had seen in earlier periods.

Positive EPS surprises are about in-line with historical trends, while revenue beats percentages are below historical levels. It is reasonable to interpret these results as suggesting that estimates were likely reasonable ahead of the start of this reporting cycle.

All in all, we didn’t see any major negative surprises this earnings season, which can reasonably be interpreted as a net positive. 

That said, a number of major companies blamed the trade uncertainty as a reason for guiding lower. Many others that didn’t guide lower still cited the trade and tariff backdrop as unhelpful to business conditions. Caterpillar (CAT), CSX Corp. (CSX), Borg Warner (BWA) are some of the notable players citing the trade issue.

Estimates for the current period (2019 Q3) have come down, as the chart below shows.

 

 

 

 

While the revisions trend is undoubtedly negative, the magnitude of decline in Q3 earnings estimates is about in-line with historical trends.

The chart below of quarterly year-over-year earnings and revenue growth for the S&P 500 index shows estimates for the current and following 3 quarters and actual results for the preceding 4 quarters.

 

 

 

 

As you can see above, earnings growth was essentially flat in the March quarter (actually down -0.1%) and Q2 is on track for a similar finish in the June quarter. Earnings growth is expected to be in negative territory in Q3 as well (down -4.1%), with positive growth expected to resume only in last quarter of the year.

Driving this weak growth picture is tough comparisons due to the huge boost to profitability in the year-earlier period. The chart below puts earnings growth expectations for full-year 2019 in the context of where growth has been in recent years and what is expected in the next two years.

 

 

 

 

The market appears to have accepted the deceleration in growth this year in the hope that growth resumes from next year onwards.

The key issue will be if expectations for next year remain stable or start coming down as we move through the remainder of the year. Analysts have not made any significant downward adjustments to their estimates in response to the ongoing trade dispute, likely in the hope that the issue will eventually get resolved. But the recent heightening of tensions and resulting pullback in benchmark treasury yields may force their hands.

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McDonald's Corporation (MCD) : Free Stock Analysis Report
 
Macy's, Inc. (M) : Free Stock Analysis Report
 
CSX Corporation (CSX) : Free Stock Analysis Report
 
Caterpillar Inc. (CAT) : Free Stock Analysis Report
 
BorgWarner Inc. (BWA) : Free Stock Analysis Report
 
Amazon.com, Inc. (AMZN) : Free Stock Analysis Report
 
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