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August 18, 2016

Where Did Consumers Shop in Q2 2016?

by Jharonne Martis.

It was a rough week for retailers. TJX Cos. beat earnings, revenue and Same Store Sales (SSS) estimates, but its stock still fell on a weaker outlook.

The world’s largest brick and mortar retailer, Wal-Mart, outperformed Target and raised full-year guidance, as we noted in this CNBC interview. Wal-Mart cleaned up its stores in the second quarter and inventory is leaner. Moreover, employee morale is up thanks to a recent pay increase, which in return is boosting sales at Wal-Mart. The rest of its core consumer is also receiving a boost from the improvement in the job market, and lower gas prices are encouraging more store visits. Wal-Mart will give more color on Jet once the acquisition is complete.

To see where consumers went shopping in the second quarter, 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 that consumers are gravitating towards value.

Retailers that are strong in the value space include Amazon.com, Dollar Tree and Ascena Retail Group. The latter is facing easy comparisons from a year ago. People are also valuing experiences over things, a trend benefiting cruise lines, leisure products such as Callaway golf clubs and gasoline retailers such as Murphy USA, which are helping put American cars on the road.

Housing trends remain strong, which is good news for earnings at home builders Toll Brothers, KB Home and TopBuild Corp. Home furnishings suppliers such as Tempur Sealy are also riding this trend.

Exhibit 1. Top Ten Earnings Growth Rates: 2Q 2016

Picture2

Source: I/B/E/S data

Earnings growth

The Q2 2016 blended earnings growth estimate is 8.6%.

In our Retail/Restaurant Index, 79% of companies have reported Q2 2016 EPS. Of the 169 companies in the index that have reported earnings for the quarter, 67% have reported earnings above analyst expectations, 10% reported earnings in line with analyst expectations and 23% reported earnings below analyst expectations (Exhibit 2).

Revenue outlook

The Q2 2016 blended revenue growth estimate is 5.5%.

Forty-seven percent have reported revenue above analyst expectations, and 53% reported revenue below analyst expectations (Exhibit 2).

Exhibit 2. 2Q 2016 Earnings and Revenue Scorecard

wal2

Source: I/B/E/S data

Same Store Sales

Of the 40 retailers that have reported 2Q Same Store Sales, 43% exceeded estimates, 2% matched, while 55% missed.

Exhibit 3. Q2 2016 Same Store Sales Scorecard

Picture4

Source: I/B/E/S data

Outlook – Q3 2016 Guidance

Retailers are warning us not to expect much good news for Q3 2016. Negative guidance came from 28 companies, while only 11 companies have issued positive EPS guidance (Exhibit 4). This is more negative guidance than the same time last year. By dividing 28 by 11, one arrives at an N/P ratio of 2.5.

Exhibit 4. 3Q 2016 Earnings and Revenue Guidance

Graph 1

Source: I/B/E/S data

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