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May 17, 2016

Big Ticket Items are Sustaining Retail Sales Growth

by Jharonne Martis.

Retailers have been reporting negative earnings lately, but April retail sales came in stronger than expected, which begs the question, where are shoppers spending their money? According to the Commerce Department they are heading for the auto showrooms despite gasoline price gains going into the Memorial Day weekend. Online sales are also taking a bigger piece of the pie, confirming that retailers should be concerned about competition from Amazon.

To see who else is benefiting from consumer spending, we looked at the highest performers in terms of earnings growth rates (Exhibit 1). When looking at the winners in terms of earnings, it’s clear there is a nesting theme.

It’s also clear that consumers are not buying apparel at mall stores.  Instead they are buying big ticket items (Exhibit 1):

  1. Recreational boats (MarineMax),
  2. Hotel stays/travel,
  3. Home builders have strong earnings growth,
  4. Autos,
  5. Swimming pools
    1. The world’s largest wholesale distributor of swimming pool and related backyard products reported solid first-quarter 2016 results.
  6. Home furnishings – Ethan Allen was strong.

Exhibit 1: Top Earnings Growth Rates – Q1 2016

Ticker Retailer Sub-industry Earnings Growth Rate
HZO MARINEMAX Specialty 400.0%
MCS MARCUS Hotels 344.4%
IBP INSTALLED Homebuilding 320.0%
SUP SUPERIOR Auto 250.0%
RCL ROYAL Hotels 185.0%
BYD BOYD Casinos 130.8%
POOL POOL Distributors 100.0%
ETH ETHAN Home 88.9%
HAS HASBRO Leisure 81.0%
DW DREW Auto 76.8%
KBH KB Homebuilding 75.0%

Source: I/B/E/S data

Here’s what to expect from retailers this week:

TUESDAY MAY, 17

CHILDREN’S PLACE, INC.

In a time when the apparel sector struggles, Children’s Place is one of the big winners and has remained a top Same Store Sales (SSS) performer since the holiday season. It gained a lot of market share during the holidays, which today translates into customer loyalty. Management has done a good job managing discounts and its merchandise is resonating well. As a result, the retailer has a 5.1% SSS estimate vs. 0.7% last year, and EPS growth of 25.8% (also double digit growth for next quarter), revenue growth of 3.1%.

TJX COMPANIES, INC.

The off-price retailers are well positioned to succeed this year. Especially since the latest reading on consumer sentiment tells us that consumers feel uncertain about the economy. In addition, the unsettling presidential election campaign means uncertainty is in the air.

Shoppers want value – and this trend is here to stay. As a result, TJX has a SSS estimate of 3.4% vs. 5.0% last year, EPS growth estimate of 4.1%, and revenue growth of 6.5%. The value factor is giving the retailer a competitive advantage. This is where the department stores struggle (KSS, M – off-price divisions). Don’t be surprised if TJX beats on the upside. They’ve done a really good job in ordering the right merchandise for the right season – anticipating strong demand. They’ve also increased their athletic wear/footwear offering, which is a hot trend right now.

HOME DEPOT

The latest economic housing data suggest that the strength in the market is here to stay. In fact, when you look at the earnings winners, it’s clear that there is a nesting theme. And the outlook for Home Depot consists of four straight quarters of double-digit earnings growth. This means that the retailer is expected to see strength on top of hard comparisons in 2015. Appliances sales are doing great – more big ticket items. Home Depot’s SSS estimate is 4.7% vs. 6.1% last year, with EPS growth of 18.8% (with the next four quarters also expected to see double digit growth). Revenue growth is pegged at 7.2%, with solid growth seen over the next four quarters.

WEDNESDAY MAY, 18

LOWE’S COMPANIES, INC.

The SSS estimate is at 4.4% vs. 5.2% last year, with EPS growth of 22.0% and estimated double-digit growth for the next quarter. Revenue growth is estimated at 5.3% with stable growth over next four quarters.

Both Lowe’s and Home Depot are benefiting from:

  • Improvement in the housing market,
  • Warmer weather in the quarter, allowing for outdoor construction,
  • Gains in appliances sales (big ticket items).

Exhibit 2: Lowe’s Companies, Inc. Earnings Growth

retail 2

Source: Eikon

 TARGET

This venerable retailer is looking at a SSS Estimate of 1.7% vs. 2.3% last year. EPS are expected to grow by 8.8% and grow incrementally over the next quarter. Revenue growth is seen at -4.6%, but expected to incrementally improve over next four quarters.

Target’s results will indicate the state of the middle-class consumer. The retailer performed well in 2015 and is facing harder comps of 1.7% on top of last year’s 2.3%, and is hoping to grow to 3%. If Target hits the mark or beats expectations, this might be a good indication of the state of the consumer. Otherwise, there’s reason to be concerned. Like most retailers, Target got hit by a weak apparel environment and grocery sales. However, the retailer is likely to see strength in activewear and home goods.

Online popularity is solid, but not as strong as in the holiday season, when the site crashed.  The retailer just released an updated RedCard, which could entice shoppers to open up their wallets.

L BRANDS

This apparel retailer has already missed its 3.9% SSS estimate with a 3.0% result. It posted an EPS result of  -9.1%, but EPS is expected to grow incrementally over the next quarter. Revenue growth of 4.1 % is also expected to incrementally improve over next four quarters. The missed SSS estimate worrisome, because LB is one of those retailers that consistently has done well when others struggled. Sales at Victoria’s Secret have decelerated because of mall traffic. Additionally, the retailer is repositioning its beauty offering and this process has hurt sales. Although sales have slowed down at VS, its Pink division seems to be doing well.

Finally, sales are being unfavorably impacted by FX conversion in Canada and the strong U.S. dollar is hurting tourism at the flagship Herald Square store in New York.

 AMERICAN EAGLE OUTFITTERS, INC.

This retailer’s SSS estimate stands at 4.7% vs. 7.0% last year. It’s facing a difficult comparison and there’s concern that because it’s a mall based retailer, it will also be hurt by weak mall traffic and online competition. Despite seeing a slowdown in comps, American Eagle is still robust at 4% (3% marks the healthy mark). Its secret weapon: the Aerie division has resonated well with millennials and created a loyal customer following. Aerie has the strongest SSS estimate in our retail universe at 17.4% vs. 12.0% last year. EPS growth estimate stands at 19.9% and the retailer is expected to post double digit growth the next quarter. Revenue growth is seen as 4.6% and is expected to remain stable over next four quarters.

Exhibit 3: American Eagle Outfitters, Inc. Earnings Growth

retail 3

Source: Eikon

Thursday May, 19

WALMART

The SSS estimate is 0.4% vs. 1.0% last year. EPS result is expected to be -14.3%. This is expected to improve but remain negative over the next quarter. Revenue growth is estimated at -1.3%, expected to improve going into the holiday season later in the year.

It’s experienced a deceleration of sales and increasing online competition. As a result, earnings have been contracting over the past two years. On top of that, the company has been spending money on omnichannel selling, technology, supply chain and labor. WalMart has been closing some big box stores, but grocery sales continue to remain a strength.

However, Amazon beware. This retailer is fighting back, testing a two-day shipping subscription. A bright step for WalMart is that it’s expanding its online presence, which might appeal to other shoppers it hasn’t already tapped yet.

Exhibit 4: WalMart Stores, Inc. Earnings Deceleration

retail 4

Source: Eikon

DOLLAR TREE INC.

In the discount space this retailer is still on top with a 2.2% SSS estimate vs. 3.4% LY, EPS growth of 13.9%, and revenue growth of 133.4%. Dollar Tree acquired Family Dollar and they are still in the process of revamping the look and feel of these stores. Together they are reaching a bigger audience, since they target different consumer income levels. Integration work is still in process, but management has pointed that they are on track for healthy results.

 Exhibit 5: Dollar Tree Inc. Revenue Growth

retail 5

Source: Eikon

GAP INC.

Its merchandise hasn’t resonated well and Gap has already missed its -2.7% SSS estimate with a -5.0% result. Earnings per share growth was negative at -43.4%, and revenue growth showed the same trend at -4.6%. In addition, traffic has been weak and Gap has lost its core consumer.

Gap’s sales have been weak for some time, with no clear improvement. For a long time, Old Navy used to shore up the overall company. However, since the retailer lost its CEO, sales started to drop and inventory levels started to rise. Gap has also been closing stores. Its Banana Republic division is the weakest performer – its spring merchandise hasn’t been accepted by shoppers. According to StarMine, it’s very likely that the company will miss and post a negative surprise.

Exhibit 6: Gap, Inc. Earnings Per Share

retail 6

Source: Eikon

Friday, May 20th

FOOT LOCKER INC.

This sports retailer’s SSS estimate stands at 4.5% vs. 7.8%, with EPS growth of 8.1% and revenue growth of 4.5%. Along with the general retail sales slowdown, sales have weakened for Foot Locker in the first quarter. However, it is still expected to report solid sales on top of difficult comparisons from last year and sales are expected to continue to improve over the next four quarters.

The retailer is known for selling famous basketball footwear, and not only have some of the initial price points on these shoes come down, but sales have decelerated during basketball season. However, going into the holiday season the trend is expected to pick up.

Exhibit 7: Foot Locker, Inc. Earnings Growth Rate

retail 7

Source: Eikon

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