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May 9, 2016

Earnings Roundup: Consumer Discretionary Results Strong as Consumers Spend on Travel and Entertainment

by Greg Harrison.

Last week was the final heavy week of the first quarter earnings season, with 126 companies in the S&P 500 reporting their results. The EPS estimate beat rate came down slightly to 69%, as seen in the exhibit below. This is lower than the overall rate for the quarter but still higher than average. When it comes to revenue, however, more companies missed estimates this week (54%) than beat them(46%).

The blended earnings growth rate continued to rise , up to -5.1% from the previous week’s -5.7%. With 88% of companies having already reported first quarter results it appears more and more likely that the index will finish with the lowest EPS growth rate since the financial crisis.

Exhibit 1Source: I/B/E/S data

As the earnings season enters the back stretch, the focus is beginning to shift to consumer companies. The Consumer Discretionary sector is expected to have the highest earnings growth of any sector, at 23.1%. The companies in the sector that reported this week reported very strong results, with 85% of them exceeding their consensus EPS estimates. Revenue results were less impressive, however, with 54% of companies this week reporting positive surprises.

Consumer Discretionary is showing strong results even though some of the retail sub-industries are expected to struggle. The Department Stores Sub-industry is expected to report the lowest growth in the sector at -34%, while Apparel Retail is expected to grow earnings by only 1%. Additionally, the Thomson Reuters Same Store Sales Index had very weak readings during the quarter, with SSS growth of -1.6%, 0.0%, and -0.1% in January, February, and March, respectively.

Exhibit 2Source: I/B/E/S data

Consumers are still spending in areas aside from retail, as companies associated with travel, hospitality, and entertainment have been reporting strong earnings. Last week these companies were heavily represented and only one fell short of forecasts. As the final companies report first quarter earnings, analysts expect improved results over the weak earnings of the majority of this earnings season, as companies from the stronger sectors will be represented to a greater extent. But even within the generally stronger consumer companies, it is important to distinguish between the companies focused on areas where consumers are spending and those that are not.

For the latest earnings data, see the S&P 500 Earnings Dashboard here: http://tmsnrt.rs/1rRoG0n

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