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August 12, 2015

Q2 Retail Earnings Expected To Be Weak

by Jharonne Martis.

The retail industry’s second quarter, which ended July 31, was not necessarily full of sunshine. We’ll be getting the complete picture over the next three weeks, but some of the big names scheduled to report earnings and same store sales (SSS) this week include Macy’s, JC Penney, Kohl’s, and Nordstrom. Since the beginning of the quarter, many store chains have been warning us not to expect too much good news.

To date, we have received 48 negative guidance, 15 positive, and three in-line. As a result, analysts have been lowering earnings estimates. Let’s see if this translates into bigger beats this season. Similarly, retailers that already reported Q2 results are warning us about Q3: to date we have received 22 negative guidance and 6 positive (Exhibit 1).

Exhibit 1: Earnings and Revenue Guidance for Q2 and Q3 2015
chart 1
Source: I/B/E/S estimates

Among the reasons for Q2 weakness, expect to hear that the strong dollar is affecting earnings abroad and tourist traffic, West Coast port disruptions, currency exchange rates, rising wage expenses, weak store traffic and tougher SSS comparisons, lower gas prices cause for weak year over year retail sales comparison.
As we await the release of key earnings we will be watching for a few key signs, including:
• Top line growth
• Guidance for Back-to-School Q3 2015 season
o Retailers are already warning us that the later Labor Day weekend will move these sales into September this year (vs. August last year)
• Inventory levels going into Q3.
• Effects of exchange rates differences (strong dollar) and lower gasoline prices.
• When Home Depot and Lowe’s report – indications as to whether consumers are still buying big ticket items for their homes.

WHO’S ON PACE TO MEET OR MISS QUARTERLY EARNINGS FORECASTS?

Exhibit 2: Q2 2015 SSS Estimate and Quarterly Earnings
chart 2
Source: StarMine Professional and Thomson One Investment Management

Seeking direction

Looking forward to anticipated Q2 performance, we used StarMine’s SmartEstimate to determine which companies in the S&P 500 are better poised to beat earnings guidance. The SmartEstimate is a weighted average of analyst estimates, with more weight given to more recent estimates and more accurate analysts. Our studies have shown that when the SmartEstimate differs from the consensus (I/B/E/S mean) by more than 2%, the company is likely to post subsequent earnings surprises directionally correct 70% of the time.

For Q2, the SmartEstimate data shows investors can expect positive surprises from Barnes & Noble Inc. and American Eagle. On the flip side, the SmartEstimates warn that negative surprises are in the offing from Fred’s and other teen retailers including Abercrombie & Fitch, Pacific Sunwear and The Buckle. In general, teen retailers are expected to see a pick-up from back-to-school sales in late August, and September, just when school starts. Shoppers like to procrastinate and a later Labor Day weekend will drive shoppers to the mall a week later this year.

In recent days, one five-star rated analyst has published a Bold Estimate, calling for Barnes & Noble to report earnings of 20 cents a share, well above the current mean forecast of 12 cents a share. The analyst is optimistic about the new CEO whose background has worked with similar retailers in the past. The retailer is looking at a 2.3% SSS estimate vs. -5.1% last year.

Going back to the end of Q2 2014, analysts have been turning significantly more bullish about American Eagle’s earnings expectations (Exhibit 3). This is one of the few retailers in our retail universe that is expected to report better store traffic, according to analysts polled by Thomson Reuters. As a results, analysts have revised upward their earnings estimates, and according to StarMine, this might not be the end of it. For the quarter, the company has the strongest SSS estimate among the teen names at 7.9% vs. -7.0% last year. And it’s poised to see earnings and revenue growth over the next four quarters. Another retailer that benefited from consistent store traffic — L Brands, which beat its 3.2% final estimate with a 4.0% SSS result. Victoria’s Secret merchandise has resonated well with shoppers.

Exhibit 3: StarMine Analyst Revisions Model (ARM) – Analysts’ sentiment
chart 3
Source: StarMine

Currency woes

Other companies have already mentioned the strong dollar and weak mall traffic as negative influences. Wal-Mart might mention the same, due to their international exposure and reliability on tourists. Department store traffic was weak in the first half of the year. Due to the weakness in traffic, analysts believe Macy’s will have to do some heavy discounting to move the BTS inventory that has been moving at a slow pace. Steep promotions could hurt margins.

Week of August 10, 2015

One of the first companies that reported this week was Macy’s. The company missed earnings, revenue and same store sales estimates. It blamed the strong dollar, declines in tourist spending, and troubles at West Coast ports. Similarly, Alibaba missed on revenue, but still posted a 28% growth in sales. Both Alibaba and Macy’s shares declined. Despite Alibaba’s impressive growth, it is on a downward trend. Millennials and technology have changed the way consumers shop. As a result, retailers have to find new creative ways to engage shoppers.

On Aug. 12, Macy’s and Alibaba announced a collaboration that could be a win-win for both. Chinese consumers enjoy American brands, and the latest reading on the Ipsos China Primary Consumer Sentiment Index (PCSI) has declined on weakening in China’s job market, investment climate, and personal investment conditions. In times like these, shoppers gravitate towards affordable fashions, which underlines why the Macy’s/Alibaba collaboration might be a nice match.

Our forecast for Macy’s next four quarters shows improvement in both bottom and top-line growth. The StarMine Earnings Quality Score for Macy’s is 89 indicating cash flow and operating efficiency levels are healthy.

Also reporting this week: Kohl’s is expected to see a 1.9% growth in earnings, and 1.5% growth in revenue. Athleisure continues to be a top trend for the back-to-school (BTS) season. Just in time for BTS, actress Shay Mitchell is collaborating with Kohl’s on an athleisure collection. The retailer has a 3.8% SSS estimate vs. 3.3% last year.

Exhibit 4: Earnings and Revenue Growth Rates %
chart 4
*Macy’s Growth is the only Actual Result. Source: I/B/E/S estimates

Penney’s story

JC Penneyis also expected to see growth in earnings and revenue. Its StarMine ARM score is high, at 94, suggesting analysts are likely to continue to revise estimates upwards. Our estimates suggests that JCP is poised to continue growing on both bottom and top line over the next four quarters.

Analysts polled by Thomson Reuters seem to like the improvements in its omnichannel sales efforts, and the fact that the company has incorporated better brands, which are helping margins. What’s more, JCP is managing discounts better and has been stabilizing its debt and finances. The new CEO is seen to be committed to bringing the company to profitability. Nonetheless, StarMine Credit Models warn us that the chances of default risk are still very high.

Exhibit 5: JC Penney StarMine Model Scores
chart 5
Source: StarMine

Week of August 17, 2015

Wal-Mart is expected to see a -6.5% drop in earnings, and -0.2% drop in revenue growth. Its StarMine Earnings Quality score is in the top decile (91), suggesting solid cash and operating efficiency. Its SSS are expected to rise 1.0%, stronger than last year’s flat result. Still, 28% of Wal-Mart’s revenue is generated internationally, which increases the company’s exposure to the stronger dollar or weakness due to currency exchanges.

Exhibit 6: Wal-Mart Revenue by Segments
chart 6
Source: StarMine

Similarly, Target has a StarMine Earnings Quality score of 93, also placing it with solid cash flow and accruals. The retailer is expected to post a 2.3% SSS, on top of a flat result last year. TGT is expected to see a 43.5% growth in earnings, while revenue is expected to be flat. Still, the company is in the top decile with the Price Stock Momentum Model suggesting price stock momentum is in the company’s favor.

Exhibit 7: StarMine Model Scores for Target
chart 7
Source: StarMine

Q2 same stores sales outlook

We are looking at a 1.1% SSS growth in Q2 2015 (vs. 1.4% in Q2 2014). The Discount, Apparel and Teen Apparel sectors are expected to perform better than last year. Still, the Footwear group is expected to post top SSS results at 4.3%.

Exhibit 8. Same Store Sales Index Q2 2015 Est Vs. Q2 2014 Est
chart 8
Source: I/B/E/S estimates

At the cash register

Urban Outfitters’ Free People division has the strongest SSS estimate, followed by Tiffany’s Europe segment at 13.4% and 10.5%, respectively. On the flip side, the Department Store sector saw weak traffic in the quarter and has the weakest estimate at -2.2%. Sears has the weakest SSS estimate in our retail universe at -10.6%. The retailer used to be the biggest retailer in our retail universe by sales until Wal-Mart surpassed it in October 1990 for the reporting period ending October 31, 1990.

Q2 2015 results so far

Of the 19 retailers that have reported Q2 Same Store Sales, 39% exceeded estimates, 6% were in-line, while 55% missed. Build-A-Bear Workshop was facing an easy -4.9%SSS from a year-ago, and managed to report an impressive 8.7% comp, considerably stronger than its 1.0% final estimate. The home furnishing sector has many strong estimates; Haverty Furniture already reported a 4.8% vs. 3.2% last year.

Exhibit 9. Q2 2015 Best Reported Same Store Sales
chart 9
Source: I/B/E/S estimates

On the flip side, Coach continues to sport the weakest results. The company continues to struggle with its store transformation and fully incorporating the new logo and look-and-feel of its stores. Meanwhile, the usual suspects continue to struggle, including The Buckle, and Regis Corp.

Exhibit 10. Q2 2015 Worst Reported Same Store Sales
chart 10
Source: I/B/E/S estimates


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