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April 13, 2016

Auto Sales Contribute to Soft Retail Outlook for Q1

by Jharonne Martis.

Auto sales dropped below 17 million in March, the sector’s weakest showing since February 2015 (Exhibit 1). This hurt the overall retail sales number for March. U.S. retail sales fell 0.3%, below Thomson Reuters’ estimate of flat results. Excluding autos, U.S. retail sales result saw a 0.1% gain, below the 0.4% estimate.

This is below February’s -0.1% decline. The early Easter (March 27) this year gave some boost to March sales since the holiday fell in April last year, but not enough to offset the weakness in auto sales. Usually, demand for the latest spring fashion trends is always strong in the weeks leading up to Easter, a time when retailers are still selling the season’s must-have items at full price.

Exhibit 1: U.S. Motor Vehicle Sales

Retail 1 auto

Source: Eikon

Consumer sentiment

The overall Primary Consumer Sentiment Index (PCSI) is down in April 2016. Despite improvement in the employment market, consumers are pessimistic about their economic conditions. What’s more, consumers are increasingly concerned about their future financial position and their investments in the financial markets. Accordingly, our Thomson Reuters Same Store Sales data suggests that consumers will spend modestly the remainder of the first quarter and underperform last year’s spending levels.

Exhibit 2: Thomson Reuters/Ipsos Consumer Sentiment Index

Retail 2 Ipsos

Source: Eikon

Q1 guidance is gloomy

April marks the last month of the first quarter for retailers. And, although March might have seen more traffic at the malls, April’s mall traffic and retail sales are expected to cool down after the Easter holiday.  What’s more, retailers keep warning us about Q1 earnings. We’ve received more negative guidance since the beginning of Q1 (February) – more than four times the amount since the beginning of the quarter. In February, we had 12 negative guidance vs. 55 today (Exhibit 3).

Exhibit 3: Q1 2016 Guidance

retail 3

Source: I/B/E/S data

Earnings growth rates

First quarter retail earnings are expected to grow 3.7%, a drop from Q4’s 5.8% result. Traditionally, the retail earnings growth rate slows down after the December holiday season. Still, the Internet  & catalog retail and household durables sectors have the highest earnings growth rates for the quarter, while the personal products sector has the weakest anticipated growth compared to Q1 2016 (Exhibit 4).

Exhibit 4: Earnings Growth Rates

retail 4 growth

Source: I/B/E/S data

SSS winners/losers

We are looking for a 1.4% SSS growth in Q1 2016 (vs. 1.6% in Q1 2015). Kate Spade managed to post the strongest SSS result over the past two quarters, and is on track to continue to do that in Q1 with an impressive 12.8% comp, considerably stronger than its 9.0% Q1 2015 result (Exhibit 5). Meanwhile, Lululemon continues to benefit from the athletic trend. The same can be said about Foot Locker and Shoe Carnival. The home improvement and furniture sectors are still strong as well.

Exhibit 5: Thomson Reuters Top SSS Estimates – Q1 2016

retail 5 estimates

Source: I/B/E/S data

Teen sector weak

On the flip side, GameStop and Sears continue to sport the weakest SSS results. Likewise, teen retailers, Zumiez and The Buckle continue to struggle. Tiffany’s continues to hurt due to a stronger dollar and weaker tourist traffic. Department stores Macy’s and Dillard’s continue to struggle to bring consumers into the doors, and according to StarMine credit models, might not be financially stable.

Exhibit 6: Thomson Reuters Bottom SSS Estimates – Q1 2016

retail 6 bottom

Source: I/B/E/S data

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