by Jharonne Martis.
A number of retailers will be reporting this week, including Macy’s, Target, Gap, Sears, JC Penney. What’s in store for them? First out of the gate is Macy’s.
Although the retailer beat its earnings estimate, the most worrisome metric from this iconic company is inventory days. During the fourth quarter ended Jan. 31, this key figure went from 172 to 192 days, its highest level since we started tracking this metric in 1991. It’s also much higher than the industry average median of 114.1, which means that a lot of Macy’s merchandise is sitting on the shelves. The retailer also reported a Q4 same store sales (SSS) result of -4.3% — the fourth straight quarter of negative SSS.
What’s more, Macy’s has a very low score in our StarMine Combined Credit Risk model, the most comprehensive StarMine credit model. This means the likelihood of default in 2016 is high. Macy’s score corresponds to an implied credit rating of BB-, suggesting it’s not financially stable. Still, the retailer did say during its earnings call that it is making changes to improve its sales, which should be visible in 2017 and beyond. Based on this positive note, Macy’s stock went up.
Home Depot enjoys good weather
Meanwhile, the only retailer that might have benefited from the warmer-than-usual-winter is Home Depot. Wages are up and consumers are spending on home improvement. The warmer weather helped boost sales of outdoor products. Looking at the next four quarters, earnings are expected to grow in the double digits. The improvement in the housing market is also boosting this retailer’s bottom line.
Looking at StarMine, this retailer has positive stock momentum going forward. What’s more, short activity is quiet – a bullish indicator. Analysts like the stock, earnings are coming from sustainable sources and the Combined Credit Risk Model suggests this retailer is in good financial form.
Target aims for growth
Results from this popular department store will indicate the economic health of the U.S. consumer. Target started the holiday season in great shape — its website even crashed due to the crush of shoppers. However, like all other retailers, its stores were hit by January’s blizzard. The retailer also is facing difficult SSS comparisons from last year, when it reported a 3.8% gain. Currently, its estimate is 1.5% SSS for Q4 2015, and earnings are expected to be up 3% from a year ago. If Target comes in stronger than expectations, it might imply that consumer spending is healthier than anticipated.
At the beginning of Q4 last November, analysts polled by Thomson Reuters started to get bullish on this retailer, raising earnings estimates due to increased demand, the right merchandise selection and omnichannel selling that pleased customers. What’s more, it offered free shipping and 15% off sitewide during Cyber Monday. Groceries account for a big portion of Target’s revenue, so we will be paying close attention to changes to its offerings such as organic products.
Sears – a sea of red
The make-or-break holiday season carried more “break” than “make” for many retailers. Analysts are looking for an expected -189% drop in earnings at Sears, in a tough environment. Many are wondering how long this retailer can continue running with these low results. There isn’t one “buy” recommendation and it already reported Q4 2015 SSS results of -7.1% — below its -5.1% estimate. Its forecast for the next four quarters shows negative growth for both earnings and revenue.
Mind the Gap
This retailer’s Q4 2015 came in worse than expected at -7.0%, below its -5.0% SSS estimate. Gap has been posting dismal results for some time. However, what’s surprising is that its Old Navy division has now started to underperform. Since the beginning of 2013, Old Navy has executed well for three straight years as it beats Gap’s own game. Many attributed Old Navy’s strong performance to its former president, Stefan Larsson – who has now moved to Ralph Lauren. Now, Gap is expected to post earnings of $0.57 per share, a -24.2% drop from a year ago.
JC Penney improving
This formerly-troubled store chain has the strongest SSS estimate among the department stores at 4.0% vs. 4.4% last year. Improved merchandise, selective promotions and its Sephora relationship are all boding well. It’s also doing a better job at controlling cost. Additionally, JC Penney scores high in the StarMine ARM model, suggesting analysts are becoming bullish. Still, analysts polled by Thomson Reuters suggest its omnichannel presence, online and mobile sites need work. Its credit also is still weak.
Overall negative guidance
Looking at Q1 2016, retailers continue to provide more negative guidance. So far, retailers have issued negative pre-announcements 23 times, with only two positive for earnings.
More companies are missing revenue estimates. In our Retail/Restaurant Index, 59% of companies have reported Q4 2015 EPS. Of the 124 companies in the index that have reported earnings to date for Q4 2015, 69% have reported earnings above analyst expectations, however, 61% reported revenue below analyst expectations. This means that sales were weaker than anticipated and companies are cutting costs to score an earnings beat – a worrisome sign.