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August 12, 2014

Retail Sales Outlook For Q2 – A Slow Return To Health

by Jharonne Martis.

Nicer weather and a more optimistic consumer mean that retail sales in Q2 (ended July) are expected to display signs of health – but the recovery seems to be slow. The Same Store Sales (SSS) Index is forecast to show a gain of 1.3%, above the icy 0.5% recorded in Q1, but below the 1.6% tallied in Q2 2013.

Watch the corresponding video to this report here.

Continuing the trend, we see a Q3 gain of 1.6% (vs. 1.9% in Q3 2013) and a Q4 increase of 1.8% (vs. 0.8% in Q4 2013).

For Q2, retailers have been lowering expectations. To date, we have received 61 reports with negative guidance, and only 7 positive. Most retailers will report earnings in the next several weeks. Some of the big names reporting this week include Macy’s, Walmart, Kohl’s, JW Nordstrom, and JC Penney.
Watch for a few key signs:

• Discount and inventory levels going into Q3.
• An improvement in mall traffic from Q1 due to improved weather. We want to see if it’s all been recuperated.
• Purchases of big ticket items for the home.
• Social media initiatives. As more consumers carry smartphones, instant gratification is key.

Get ready for these big names:
• Macy’s – has consistently performed well. Look to see if the middle-class consumer, which was lost during the bad weather, is fully engaged again.
• Wal-Mart – insight on the state of the value-conscious consumer.
• Kohl’s — a favorite during back-to-school as it carries exclusive brands using celebrity Bella Thorne.

EXHIBIT 1. SAME STORE SALES INDEX 2014 EST. VS. 2013 ACTUAL

Health

Source: I/B/E/S estimates.

Staying cozy at home

One trend that’s emerging when looking at retailers that have already reported is that consumers are still investing in their homes through decoration and renovation. The strongest performers so far include Ethan Allen and Pier 1 Imports.

EXHIBIT 2. Q2 2014 BEST REPORTED SAME STORE SALES

Health 1

Source: I/B/E/S estimates.

Kitchen and bath get attention

Even looking at the next quarters, stores like Williams-Sonoma (NYSE:WSM) and The Home Depot, Inc. (NYSE:HD) are among the retailers expected to turn out the strongest same-store sales gains in Q3 as shoppers continue to make sprucing up their homes a top priority.

EXHIBIT 3. Q3 2014 STRONGEST SAME STORE SALES ESTIMATES

Health 2

Source: I/B/E/S estimates.

Back-to-school trends

Looking toward the start of classes, teens want unique items, and are willing to pay full price for it. Watch Forever 21 Inc., H&M Hennes & Mauritz AB (HMb.ST) and Zara, owned by Inditex SA (ITX.MC) (Read our Back-to-School report for more).

Standout retailers

Gamestop has the highest SSS expectation in our retail universe at 15.7% as video game sales rose over 50%. This is not the end of it — analysts are bullish on the retailer going into the holiday season. Popular video games and hardware are usually introduced in November, just in time for holiday shopping.GME is expected to profit in the fourth quarter, and potentially see a rise in earnings and revenue of 23%, and 13%, respectively.

EXHIBIT 4. GAMESTOP Q2 2014 ESTIMATES VS. ACTUALS

Health 3

Source: I/B/E/S estimates.

JC Penney, recently struggling, has a high probability of beating earnings expectations, according to StarMine. The EPS consensus mean is a loss of 9 cents. However, according to a highly-rated analyst with a very accurate reputation, EPS could come in at a loss of 6 cents (vs. a loss of $2.20 Q2 2013).

Macy’s vs. JC Penney

Both are expected to see improvement in SSS, earnings and revenue. JCP is experiencing more of an improvement, where Macy’s is consistently performing well. JCP is facing one of the easiest Q2 SSS comparisons from a year ago (-11.9% in Q2 2013). The same can be said about earnings, which is why they are likely to beat estimates.

This will mark JCP’s third quarter of growth after nine quarters of earnings declines. The company is trying to regain its core promotion-loving consumer. However, the company is struggling to offer the right amount of discounts without compromising margins. This is a strategy that fellow department store Macy’s has been able to master in difficult retail times.

EXHIBIT 5. JC PENNEY AND MACY’S Q2 2014 ESTIMATES VS. ACTUALS

Exhibit 5

Source: I/B/E/S estimates.

By the numbers

As the weather improved, so did traffic at Macy’s for the entire Q2. Most analysts are bullish on the retailer, and have been raising Q2 earnings estimates. Like other strong performing retailers, Macy’s has experienced robust home-related sales. The retailer is looking at about a 19.4% growth estimate for Q2 earnings, and 3.9% growth in revenue. Same Store Sales is also stronger than a year ago; Q2 2014 estimate of 4.0%, above -0.8% SSS in Q2 2013. On the StarMine Valuation-Momentum (Val-Mo) Model, Macy’s scores a very high 94, which combines two sets of metrics designed to measure a stock from both a value and growth perspective. The stock’s price momentum also looks great, with a Price Mo score of 99 and strong momentum as well as industry momentum.

EXHIBIT 6. MACY’S STARMINE MODELS, AND 2014 SSS ESTIMATES VS. 2013 SSS ACTUALS

Health 5

Source: I/B/E/S estimates, Eikon, StarMine.

Wal-Mart weakness

Almost every analyst covering Wal-Mart has lowered its earnings estimate. The retailer is on track for its sixth consecutive quarter of weak SSS. Its core consumer is being hit with higher payroll taxes, healthcare expenses, unemployment and loss of food stamps. As a result, they are trading down to the dollar stores. The middle-class consumer used to go to Wal-Mart for their consumer staples. However, Wal-Mart is now facing increased e-commerce competition and is losing market share to the likes of Amazon.com.

In an effort to regain its core customer, the retailer is currently incorporating more rollback activity and making food categories more of a focus during the back-to-school season. The retailer is usually a favorite when it comes to buying school supplies. As a result, SSS are expected to improve in the third quarter. Earnings and revenue expectations are not stellar:

EXHIBIT 7. WAL-MART Q2 2014 ESTIMATES VS. ACTUALS

Health 6

Source: I/B/E/S estimates.

A Sea of Red

American Apparel’s brand has taken a bit of a beating. Earnings and revenue are expected to be flat. -0.6% SSS is weaker than a year-ago 7.0% gain. They are low on cash, and according to StarMine have a high probability of credit default. However, with a management change, analysts are more optimistic on APP’s future.

American Apparel has the lowest score of 1 on the StarMine Combined Credit Risk (CCR) model, the most comprehensive StarMine credit model. Its calculation of the probability of default maps to an implied credit rating of CCC- to company debt and incorporates three other StarMine models (see below).

EXHIBIT 8. STARMINE COMBINED CREDIT RISK MODEL IMPLIED CREDIT RATING HISTORY

Health 7

Source: Eikon, StarMine.

Model outcomes

1) Structural Credit Risk (SCR) model, which evaluates the equity market’s view of the company’s credit risk on a range from 1 to 100. American Apparel’s score of 1 places it below 99% of its peers.
2) SmartRatios Credit Risk (SRCR) model, which uses the company’s profitability, leverage, interest coverage, liquidity and growth to model the credit risk. The increasing debt burden, reduction of cash, and lack of profits explains APP’s score of 2.
3) Text Mining Credit Risk (TMCR) which scans transcripts, Reuters news articles, filings and select broker research to identify key words that may indicate negative news sentiment. American Apparel again is at a low score of 3.

EXHIBIT 9. STARMINE COMBINED CREDIT RISK MODEL COMPONENT MODEL SCORES

Health 8

Source: Eikon, StarMine.


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