In an unsettling election year, Americans aren’t showing much confidence in the economy – and that emotion is showing up in the Q1 outlook for retail earnings.
Retailers are reporting Q1 2016 earnings and are telling us not to expect much from them. For Q1 2016, retailers have issued negative guidance 55 times, while only 11 companies have issued positive EPS guidance. Consumers are feeling unsure about economic conditions and as a result have been spending modestly. The overall Thomson Reuters Primary Consumer Sentiment Index (“PCSI”) increased slightly in May 2016 after a sharp drop last month. Compared to this time last year (May 2015), consumer confidence is down but compared to two years ago (May 2014) has improved slightly.
Exhibit 1: Q1 2016 Earnings Guidance
Source: Thomson Reuters I/B/E/S estimates
Outlook and trends
First quarter retail earnings are expected to grow 7.2% over Q1 2015. 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 2015 (Exhibit 2).
The Internet & catalog retail sector is the clear winner, with an earnings growth rate of 134.1%. That strength is being led by Amazon’s robust earnings results, followed by Priceline. Likewise, the household durables sector is receiving a boost from the home building subsector which has benefited from the strong housing market.
On the flip side, the personal products sector has the weakest earnings growth rate at -30.3%. Avon (-275%) and Edgewell (-40.6%) are bringing the group down. They are hurting from strong dollar conversions.
Exhibit 2: Q1 2016 Earnings Growth: Retail Industries
Source: Thomson Reuters I/B/E/S estimates
Same Store Sales outlook
We expect a 1.4% SSS growth in Q1 2016 (vs. 1.6% in Q1 2015).
Exhibit 3. Thomson Reuters Same Store Sales Index Q1 2016 EST VS. Q1 2015
Source: Thomson Reuters I/B/E/S estimates
Winners
Kate Spade and Ethan Allen already blew away expectations with 19.0% and 18.6% results, respectively. Other names to look out for in the space are Home Depot and Lowe’s who are benefiting from the strong housing market (Exhibit 4). Despite weakness in the teen space, American Eagle is looking at a 4.7% SSS estimate. Its Aerie division is giving the teen store a boost with a 17.4% estimate. Lululemon is benefiting from the hot athleisure trend.
Exhibit 4. Thomson Reuters Same Store Sales – Top Estimates Q1 2016
Source: Thomson Reuters I/B/E/S estimates
Struggling stores
Department stores continue to hurt. Macy’s posted its fifth consecutive quarter of negative Same Store Sales. The retailer blamed a drop in tourist spending and said apparel is not driving traffic. The retailer is feeling the pinch from online competition and other off-price retailers. As a result, it’s investing in its Macy’s Backstage division, customer service and mobile technology.
Similarly, other department stores Stage Stores and Sears are all expected to see a drop in SSS. Nordstrom is expected to eke out a 0.1% SSS growth, well below last year’s 4.4% result. The Buckle was facing an easy -2.2% SSS from a year ago, and still managed to report a weak -11.1% comp, considerably weaker than its -6.8% final estimate.
Exhibit 5. Thomson Reuters Same Store Sales – Bottom Estimates Q1 2016
Source: Thomson Reuters I/B/E/S estimates
Value shopping
The dollar stores remain on top with the strongest SSS estimates, with all eyes on Walmart and Target. The latter is investing in omnichannel marketing and supply chain improvements; according to StarMine, earnings are coming from sustainable sources. Similarly, consumers still prefer to buy designer clothing at a discount and off-price retailers TJX and Ross Stores benefit from this with a 3.3% and 2.4% SSS estimates.
Exhibit 6. Thomson Reuters Same Store Sales Estimates – Discounters Q1 2016
Source: Thomson Reuters I/B/E/S estimates
