by Jharonne Martis.
Of the companies left to report this week, Ross Stores is best poised to see positive earnings and revenue YoY% growth, and robust Same Store Sales (SSS). Additionally, forecasts show improvement in both bottom and top-line growth over the next four quarters.
Ross Stores in fashion
Ross Stores, Inc. (ROST.O) is best known for affordable fashion items selling designer names for less, but the company’s stock price has also been turning heads, almost doubling over the past year. And according to StarMine, the ride might not be over. The retailer scores an 86 in the Price Momentum model, placing it in the top 15% percent of all U.S. stocks. High scores on this proprietary measure indicate positive price momentum and a strong likelihood of the stock price trending upward.
The latest results in the Thomson Reuters/Ipsos Consumer Sentiment reading shows that consumers are holding back on spending as there’s been a lack of positive economic news. Accordingly, the latest earnings results suggest that consumers are value oriented and want affordable fashion.
Gap Inc. (GPS.N) has already reported a -2.0% SSS for Q2, missing its final estimate and coming in below last year’s result. However, its Old Navy division is usually the strongest division during the back-to-school season and was the only division that saw a positive growth of 3.0%. Not only is it benefiting from the fact that consumers want affordable fashion, its merchandise is resonating well with shoppers. Old Navy generates 40% of Gap’s total revenue. Still, despite the brand’s strength, Gap’s total revenue is expected to see a -0.7% growth (YoY%). The Gap Global brand was the weakest performing group in Q2 with a -6.0% SSS, followed by Banana Republic’s -4.0% SSS.
Banana Republic’s merchandise didn’t really evolve or change in the first half of the year. As a result, consumers already had these items in their closets and didn’t see the necessity to buy more of the same. Going into the second half of the year, newness in fashion is expected. However, July’s weak SSS suggests that the merchandise isn’t resonating well just yet. Still, forecasts show improvement in both bottom and top-line growth over the next four quarters for Gap.
Q2 Same Store Sales scorecard
So far, of the 38 retailers that have reported Q2 Same Store Sales, 55% exceeded estimates, 3% were in-line, while 42% missed.
Source: I/B/E/S estimates
Fly like an eagle
As predicted by StarMine SmartEstimate, American Eagle outfitters Inc. (AEO.N) beat its Q2 Earnings estimate. The retailer also beat revenue and Same Store Sales projections, and posted the strongest comp at 11.0% in our retail universe so far (see chart above). What’s more the company raised Q3 earnings guidance. Despite these strong results, the stock was down about 6% in midday trading, which suggests that market expectations might have been higher than analysts’ expectations. The retailer also said it now expects comps to be in the single digits for Q3, a decline from the 11% Q2 result.
Likely to beat forecasts
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 also expect positive surprises from Barnes & Noble Inc. (BKS.N). The retailer currently has an EPS mean forecast of 12 cents a share. However, there’s a five-star rated analyst with a very accurate rating that published a Bold Estimate, calling for Barnes & Noble to report earnings of 20 cents a share, well above the mean. The analyst is optimistic about the new CEO who has worked with similar retailers in the past. The retailer is looking at a 2.3% SSS estimate vs. -5.1% last year.
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, a shift of tax holidays into August, and a later Labor Day weekend will drive shoppers to the mall a week later this year.
Outlook and trends
Second quarter retail earnings are expected to grow 5.6% over Q2 2015. The Multiline and Internet & Catalog Retail sectors have the highest earnings growth rates for the quarter, while the Personal Products sector has the weakest anticipated growth compared to Q2 2014 (Exhibit 1).
Multiline sector booming
The Multiline Retail sector has the highest earnings growth rate (27.9%) of any sector. Target has the biggest earnings growth rate in the group at 56.4%. Likewise, Dollar General and Dollar Three are all expected to see huge improvements in earnings from a year ago with earnings growth rates of 13.4%. and 11.1%, respectively. The Internet & Catalog Retail sector has the second highest earnings growth rate (18.6%) of all 11 sectors.
The Personal Products industry has the lowest growth rate (-35.7%) of any sector. Four of the five retailers in the sector saw earnings decreases compared to Q2 2014, led by Avon Products Inc. (-45%) and Estee Lauder Companies Inc. (-39.4%).
Q3 2015 Guidance
As retailers continue to report second quarter results, they keep warning us about weakness in the current third quarter. To date, we’ve received 29 negative earnings guidance, up from 22 last week, and 14 total negative revenue guidance for Q3 (Exhibit 8).
Watch the accompanying video here.
Receive stories like this to your inbox as they are published. Subscribe here and follow us @Alpha_Now on Twitter or check out the Eikon blog. If you are looking to access our data or analytics, register for a free trial.