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November 9, 2016

U.S. Retailers and Restaurants Cautious About Q3 Earnings

by Jharonne Martis.

Retailers are getting ready to report Q3 2016 earnings, but are already warning us not to expect much good news. Negative guidance came from 63 companies, while only 18 companies have issued positive EPS guidance (Exhibit 1). What’s more, this negative guidance is worse than that provided at the same time last year.

The same can be said about consumers. The latest reading on the Thomson Reuters Primary Consumer Sentiment Index (“PCSI”) shows that although consumers are feeling good about their current conditions and investments, there’s still some slight concern around future economic and job expectations. This is also reflected in the estimated earnings growth rates for the third quarter.

The estimated growth rate for the Food and Staples sector is a robust 7.7% for Q3, stronger than various discretionary sectors’ estimates. This is evidence that consumers are sticking more to basic necessities this year vs. 2015 when discretionary spending was stronger.

Exhibit 1: Q3 2016 Earnings and Revenue Guidance vs. Q3 2015

q3-1

Source: I/B/E/S estimates

Outlook and trends

Third quarter retail earnings are expected to grow 9.1% over Q3 2015. The Internet & Catalog retail and Hotels, Restaurants & Leisure sectors expect the highest earnings growth rates for the quarter, while the Personal Products sector has the weakest anticipated growth compared to Q3 2015 (Exhibit 2).

Internet & Catalog retail is expected to see earnings grow by 24.2%. The strength is being led by Amazon’s 205.9% robust earnings growth rate, followed by FTD Companies and Netflix’s strong 100.0% and 71.4% earnings results. The Hotels, Restaurants & Leisure sector is expected to increase earnings by 20.9%. The sector is receiving a boost from Churchill Downs Inc. 116.7% earnings growth rate result, followed by Belmond Ltd. which is reported a 64.3% earnings growth rate.

On the flip side, the Personal Products sector has the weakest earnings growth rate at
-19.0%. Coty (-61.0%) and Estee Lauder Companies’ (2.4%) weak earnings results are bringing the group down.

Exhibit 2: Q3 2016 Earnings Growth: Retail Industries

q3-2

Source: I/B/E/S estimates

Winners

Of the 145 companies in the Thomson Reuters Retail and Restaurant group that have reported earnings to date for Q3 2016, 57% have reported earnings above analyst expectations, 9% are in line, and 34% missed.  Amazon and Churchill Downs are on top with 205.9%, and 116.7% earnings growth rates, respectively. The apparel group earnings have also picked up. Also, It’s evident from the list of winners that home builders are still profiting and consumers prefer experiences over things by staying in and watching a movie via Netflix.

Exhibit 3. Thomson Reuters Strongest Earnings Growth Rate Results: Q3 2016

q3-3

Source: I/B/E/S estimates

 Losers

 Arctic Cat Inc. and Chipotle Mexican Grill Restaurant posted the weakest earnings growth rates at -203.5%, and -94.1%, respectively. The companies below are also hurting from company specific issues versus sector-wide related difficulty.

Exhibit 4. Thomson Reuters Weakest Earnings Growth Rate Results: Q3 2016

q3-4

Source: I/B/E/S estimates

 Same Store Sales outlook

We expect a soft 1.1% SSS growth in Q3 2016 (vs. 1.4% in Q3 2015).

Exhibit 5. Thomson Reuters Same Store Sales Index Q3 2016 EST VS. Q3 2015

q3-5

Source: I/B/E/S estimates

 Cosmetics and handbags

Other names to look out for are Ulta Salon Cosmetics and Lululemon (Exhibit 5). Ulta Salon Cosmetics has been enjoying stronger sales, and margins. As a result, the retailer is expected to register the strongest SSS for Q3 at 14.4%. The retailer is also a favorite going into the holiday season. Meanwhile, Kate Spade already reported a 7.0% SSS results, slightly below its 7.1% final estimate. The retailer is still the strongest in the handbag accessories group and posted a robust result, despite facing a difficult comparison last year of 16.0% SSS.

Exhibit 6. Thomson Reuters Same Store Sales – Top Estimates Q3 2016

q3-6

Source: I/B/E/S estimates

Losers

On the flip side, the department stores continue to hurt. Stage Stores, Sears, and Gordmans Stores are all expected to see a drop in SSS. The Buckle was facing an easy -5.2% SSS from a year ago, and still reported the weakest result at -15.3%, below its -10.6% final estimate.  Meanwhile, Express is expected to register a -9.7% comp, weaker than its 6.0% final estimate.

Exhibit 7. Thomson Reuters Same Store Sales – Bottom Estimates Q3 2016

q3-7

Source: I/B/E/S estimates


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