More retailers will report Q2 earnings results this week. Last week, retailers got hurt by using words like “promotions” and “discounts.” It looks like Wall Street is focusing on margins over earnings growth.
Within the S&P 500, there are only three department stores: Macy’s, Kohl’s and JW Nordstrom. Macy’s stock took a beating after the retailer said it was offering promotions. On the flip side, Kohl’s missed revenue and Same Store Sales estimates, but its stock was up. Kohl’s saw an improvement in sales and kept costs low during the quarter. Nordstrom announced a new acquisition, which overshadowed news of future spending.
EXHIBIT 1. S&P 500 DEPARTMENT STORES Q2 EARNINGS/REVENUE GROWTH RATES
Source: I/B/E/S estimates.
Who wants a better deal?
Fossil said its leather category is still highly competitive and promotional. Caché said it is moving away from promotions and trying to build customer loyalty. “Gross margin in the wholesale business was 31.3% compared to 32.1% in last year`s second quarter, due primarily to increased markdown allowances” (Source: Caché earnings call, 8/11/2014).
EXHIBIT 2. RETAILERS MENTIONING PROMOTIONS/DISCOUNTS IN EARNINGS CALLS
Source: StreetEvents.
This week’s results
Home Depot beat on both earnings and revenue and raised its full-year guidance. The company saw an improvement in traffic in the second quarter, which underlines that Q1 weakness was weather- related. On the StarMine EQ model, Home Depot scores a very high 92, which means its earnings come from sustainable sources and are expected to continue being strong going forward. The bulk of analysts are recommending a buy/hold when it comes to the stock.
EXHIBIT 3. HOME DEPOT STARMINE MODELS AND STOCK RECOMMENDATIONS
Source: Eikon, StarMine
A discounting winner
Similarly, TJX Companies raised its full-year guidance. Despite Wall Street’s fear that the discounting group is losing traction, TJX was able to sustain its market share and is poised to continue doing well during the second half of the year. This is due to their secret weapon, which is their layaway program – a favorite during the back-to-school and holiday seasons.
EXHIBIT 4. TJX COMPANIES EARNINGS ACTUALS AND ESTIMATES
Source: I/B/E/S estimates.
Replicating JCP?
Aeropostale announced it was bringing back former CEO Julian Geiger, effective immediately. However, Aeropostale’s challenge will be to compete with fast fashion retailers without compromising margins. Most analysts are recommending a Hold when it comes to the stock – kind of a “wait and see what happens next.”
EXHIBIT 5. AEROPOSTALE STARMINE MODELS AND STOCK RECOMMENDATIONS
Source: Eikon, StarMine
Margins might slip
Within the S&P 500 companies, there are more companies with a strong probability of margins slipping. Below is a list of companies in the consumer staples/discretionary sectors with high revenue (Actuals and Estimates) vs. low earnings:
EXHIBIT 6. S&P500 RETAILERS WITH HIGH Q2 REVENUE/LOW EARNINGS (ACTUALS AND ESTIMATES)
Source: I/B/E/S estimates.
Q3 guidance
Companies are also already warning us not to expect too much from them in the third quarter. In our retail universe, there have been 21 negative EPS pre-announcements for Q3 2014 compared to one in-line and three positive EPS pre-announcements. By dividing 21 by 3, one arrives at a negative/positive ratio of 7.0 for the retailers.
EXHIBIT 7. S&P 500: Q3 2014 PREANNOUNCEMENTS
Source: I/B/E/S data
What to expect this week
Of the retailers left to report, teen names are still in the bottom five. These retailers have lost market share to the fast fashion stores like H&M, Forever 21 and Zara.
EXHIBIT 8. TOP 5 SAME STORE SALES ESTIMATES – Q2 2014
Source: I/B/E/S data
Strong outlook for gaming
On the flip side, Gamestop has the highest SSS expectation in our retail universe at 15.7% as video game sales rose over 50% in the quarter. Home improvement and furnishings are still the strongest performers. As a result, Williams-Sonoma is expected to see gains of 6.2% SSS.
EXHIBIT 9. BOTTOM 5 SAME STORE SALES ESTIMATES – Q2 2014
Source: I/B/E/S data
SSS scorecard – home furnishings on top
Of the 76 companies in the Same Store Sales index, 35 have reported Q2 2014 Same Store Sales results. Of these, 54% exceeded SSS estimates, while 46% missed them. One trend that’s emerging 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 10. Q2 2014 BEST REPORTED SAME STORE SALES
Source: I/B/E/S data
Home furnishing contributes to earnings
Of the 29 retailers that have reported Q2 earnings, 38% exceeded earnings estimates, 17% were in-line, while 45% missed. On the revenue side, 46% exceeded estimates, while 54% missed.
EXHIBIT 11. S&P 500: Q2 2014 EARNINGS SCORECARD
Source: I/B/E/S data
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