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November 12, 2015

Retailers See Mixed Outlook For Q3 Earnings, Sales

by Jharonne Martis.

In general, mall traffic has been weak during the retail industry’s third quarter, ending Oct. 31. Warmer-than-usual weather has hurt fall-related merchandise. What’s more, the strong dollar is hurting tourist sales in major U.S. stores, including Macy’s flagship at Herald Square in New York. Let’s dig deeper.

Looking at the retailers and restaurants in our earning universe, 136 companies or 66% have reported Q3 earnings. Of these, 60% have reported earnings above analyst expectations, 11% reported earnings in line with analyst expectations and 29% reported earnings below analyst expectations.

For Q3 2015, there were 56 negative EPS preannouncements issued by retailers and 14 positive. Overall, however, third quarter earnings are expected to rise 7.1% from Q3 2014.

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

Since the beginning of the quarter, retailers have been warning us not to expect too much from them. Due to the negative warnings, analysts have been lowering estimates. Let’s see if this translates into bigger beats this season. Similarly, retailers that already reported Q3 results are warning us about Q4: to date we have received 12 negative guidance, 1 positive, and 2 in-line (Exhibit 1).

Exhibit 1: Earnings Guidance Q3 and Q4 2015

Source: I/B/E/S estimates.

Department stores reporting

Retailers will be announcing Q3 2015 earnings and same store sales over the next few weeks. Some of the big names reporting this week include Macy’s, JC Penney, Kohl’s and Nordstrom.
Among excuses for Q3 weakness, expect to hear that the strong dollar is affecting earnings abroad and tourist traffic at home. Other negative factors expected to be cited: currency exchange rates, rising wage expenses, weak store traffic and warmer-than-usual weather.
As we await the release of key earnings we will be watching for a few key signs, including:
• Inventory levels going into the third quarter.
• Guidance for the holiday season in Q4.
• Any exchange rates differences (strong dollar), and gasoline prices effects.
• Looking to see if consumers still buying big ticket items for their homes – when Home Depot and Lowe’s report.

Department stores reporting

First one that reported during the week beginning Nov. 9 is Macy’s, which beat earnings forecasts but missed revenue and same store sales estimates.

During Macy’s earnings call, executives said inventory levels were up 4.6% and that the goal was to have clear inventory levels beginning in spring 2016.This means more markdowns going into the holiday season, which will hurt margins. As a result, the retailer cut its full-year earnings guidance and its stock took a hit.

According to StarMine this might not be the end of it. Macy’s scores a 20 on the Analyst Revisions Model (ARM), which means analysts polled by Thomson Reuters are bearish on the retailer and are lowering their earnings estimates. What’s more, the retailer scores a 19 on the Price Momentum Model (PriceMo) suggesting price stock momentum is negative, the stock price is likely to continue to decline. We’ve also seen a steady decline on StarMine’s Implied Credit Letter grade since the second quarter.

Exhibit 2: Macy’s StarMine Scores

Source: Eikon

Department store outlook

In general, department store traffic was weak during the third quarter. Warmer weather hasn’t helped sell coats at full price. However, Kohl’s stock rose on stronger revenue and SSS. The company said back-to-school sales helped Q3 sales. Athleisure (clothing that doubles as athletic wear and casual wear) was a top trend for the BTS season. We hear that shoppers were raving about actress Shay Mitchell’s collaboration with Kohl’s on an athleisure collection.

Exhibit 3: Department Store Earnings, Revenue Growth Rates % and SSS Estimates
Source: I/B/E/S data

Meanwhile, JC Penney already reported a 6.4% SSS result. It faced easy comparisons from a year-ago (flat comp). Analysts polled by Thomson Reuters are optimistic on the retailer’s recent investments in technology and seem to like the improvements in its omni-channel selling.

However, in the long run analysts are still bearish: the estimate of long term growth (LTG) for this stock is less than -10%. What’s more, its StarMine Credit Models warn us that the chances of default risk are still very high. On the flip side, Nordstrom is receiving a boost from its Rack division and is on track to post its sixth consecutive quarter of robust comps.

Exhibit 4: JC Penney StarMine Model Scores

Same store sales

We are looking for a 1.5% SSS growth in Q3 2015 (vs. 1.7% in Q3 2014). The specialty sector is expected to perform the strongest, but weaker than last year. Still, the beauty supplies group is expected to post top SSS results at 4.7%, followed by home improvement at 4.4%.

Exhibit 5. Thomson Reuters SSS Index Q2 2015 Est Vs. Q2 2014 Est
Source: I/B/E/S estimates

Q3 2015 results so far

Of the 24 retailers that have reported Q3 same store sales, 42% exceeded estimates, while 58% missed. Despite facing a difficult 15.2% SSS from a year-ago, Kate Spade managed to report an impressive 16% comp, considerably stronger than its 11.8% final estimate.

Likewise, American Eagle continues its streak of strong comps. The teen store has now posted three straight quarters of robust SSS.

L Brands merchandise is not only flying off the shelves, but according to StarMine is very likely to beat earnings estimates next week.

Exhibit 6. Q2 2015 Best Reported Same Store Sales

Source: I/B/E/S estimates

On the flip side, Coach continues to sport the weakest SSS results. However, it’s important to note, that for the first time after eight sluggish quarters the company is showing signs of recuperation. Similarly, Michael Kors faced difficult comparisons of 16.4%, and posted a -8.5% SSS result. Meanwhile, the usual suspects continue to struggle, including The Buckle, and Regis Corp.

Exhibit 7. Q2 2015 Worst Reported Same Store Sales

Source: I/B/E/S estimates

Consumer confidence

The overall Primary Consumer Sentiment Index (“PCSI”) is up slightly for November 2015. Consumers are getting excited about the holiday season, and sentiment has picked up slightly. But the sentiment hasn’t improved enough to offset their concern about the future of job security. Accordingly, our Thomson Reuters Same Store Sales data suggests that consumers will spend modestly going into the holiday season, and still underperform last year’s spending levels.

Exhibit 8: Thomson Reuters/Ipsos PCSI Shows Improvement in November

Source: Eikon

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