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November 16, 2015

Retail Earnings: Shoppers Are Looking For Value On The Clothes Racks

by Jharonne Martis.

A sea of red took over retailers in the second week of November, as they continue to warn they are experiencing high inventory levels going into the end of the year. That has the potential to translate into big markdowns during the holiday season and lower margins for Q4 earnings.

In theory, consumers have been enjoying lower gasoline prices, and credit interest rates. As a result, they have been buying cars, but not shopping at the malls. As shoppers continue to buy big ticket items, home improvement and furnishing sectors are poised to continue to benefit from this trend. We’re watching for reports this week from Home Depot and Lowe’s. Let’s take a look at earnings expectations, Q4 guidance, earnings and Same Store Sales scorecards.

Earnings scorecard

Looking at the retailers and restaurants in our earning universe, 148 companies or 72% have reported Q3 earnings. Of these, 59% have reported earnings above analyst expectations, 11% reported earnings in line with analyst expectations and 30% reported earnings below analyst expectations.

Turning toward the top line, 39% of companies have reported Q3 2015 revenue above analyst expectations and 61% reported revenue below analyst expectations.

Exhibit 1: Q3 2015 Earnings and Revenue Scorecard

1

 

More negative Q4 guidance

Retailers keep warning us about Q4 earnings. We’ve received more negative guidance since last week – more than twice the amount. Last week, we had 12 negative guidance vs. 28 today.

 

Exhibit 2: Q4 2015 Guidance

2

 

Same Store Sales Scorecard

Of the 28 retailers that have reported Q3 same store sales, 43% exceeded estimates, while 57% missed.

3

 

Home Depot vs. Lowe’s Cos.

Consumers are still buying big ticket items at home improvement retailers, which are poised for earnings and revenue growth over the next four quarters (exhibit 1). They are both poised for double digit EPS growth. Analysts polled by Thomson Reuters suggest LOW is expected to see a higher EPS growth, but is expected to decelerate at a faster rate over the next four quarters.

 

Exhibit 4: Lowe’s vs. Home Depot EPS Growth Rate Actuals and Estimates

4

Home Depot is on track to post a 4.6% SSS vs. 5.2% last year. A 3.0% SSS reflects healthy consumer spending. HD is on track to report six straight quarters of 3.0% or higher. The same can be said about Lowe’s.

 

Exhibit 5: Lowe’s vs. Home Depot EPS Growth Rate Actuals and Estimates

5

 

Wal-mart

WMT scores high in the StarMine Earnings quality model. Although its earnings come from sustainable sources, its price stock momentum is negative and analysts are bearish on the retailer. The retailer is on track to post a 1.4% SSS, stronger than last year’s 0.5% SSS result. Still, margins are being hit by labor costs. The retailer has lost its pricing advantage to other competitors including the dollar stores and Amazon.com. The retailer is banking on its omni-channel initiatives and holiday promotions to lure shoppers in.

6

 

Target

On the flip side, Target’s operating profit margin looks good. And analysts polled by StarMine are bullish on its ability to open more localized shops in urban areas and its RedCard loyalty program.

7

TJX vs. ROST

During the great recession, shoppers only wanted to buy at discounted prices, which today has translated into consumer loyalty at TJX. StarMine tells us that TJX has solid credit, earnings are coming from sustainable sources, and analysts are optimistic on the company’s strategy. The retailer is on track to post a 3.8% SSS vs. 2.0% last year.

8

 

Ross Stores

Similarly, StarMine says the same is true for ROST. However, Ross Stores is on track to post a 2.2% SSS, below TJX 4.0% SSS. TJX is on track to post four straight quarters of SSS of 3.0%, or higher. Still, analysts polled by Thomson Reuters warn about the increasing competition TJX and ROST face against fast fashion retailers.

 

Exhibit 9: TJX and Ross Stores Same Store Sales Actuals and Estimates

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