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December 21, 2016

Consumer Confidence Marks U.S. Holiday Retail Season

by Jharonne Martis.

The Thomson Reuters/Ipsos Primary Consumer Sentiment Index (PCSI) hit a new post-recession high point. The holiday shopping season is in full swing, and consumers are feeling upbeat about their future economic situation. This is also reflected in our Thomson Reuters Retail and Restaurant Earnings growth rates, which are expected to improve and show double digit gains in 2017.

Exhibit 1: Thomson Reuters Retail and Restaurant Earnings Growth Rates 2016 – 2017

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Source: I/B/E/S data

Exceeding expectations

For Q3 2016, The Thomson Reuters Retail and Restaurant Earnings Growth Rates registered a 10.1% result, which came in stronger than expectations (Exhibit 1). Despite receiving a considerable amount of negative guidance, 60% of the companies in our Retail and Restaurant Index beat expectations.

Looking at the current Q4 2016, earnings growth rate are expected to drop to 5.4%, but then are expected to recuperate to double digit growth rates in 2017.

Similar to the previous quarter, retailers continue to warn us not to expect much the current quarter. For Q4 2016, there are now 53 negative EPS preannouncements issued by retailers vs. 30 a month ago, and 13 positive (Exhibit 2).

Exhibit 2: Earnings Guidance Q4 2016

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Source: I/B/E/S data

Food, hotels decline

Since the beginning of the quarter, the Food & Staples sector (-11.7%), and Hotels, Restaurant & Leisure Group (-10.2%) sectors have recorded the highest percentage decreases in earnings, while the Personal Products (21.2%) sector has recorded the highest percentage increase in earnings.

Still, the Internet & Catalog retail and Hotels, Restaurants & Leisure sectors expect the highest earnings growth rates for the quarter, while the Food & Staples sector has the weakest anticipated growth compared to Q4 2016 (Exhibit 3).

Internet & Catalog retail is expected to see earnings grow by 18.3%. The strength is being led by Expedia’s 80.3% estimated earnings growth rate, followed by Amazon’s 36.9% earnings results. The Hotels, Restaurants & Leisure sector is expected to increase earnings by 11.5%. The sector is receiving a boost from Belmond Ltd. 100.0% estimated growth rate, followed by Marriott Vacations Worldwide Corp. which is expected to see a 56.6% earnings growth rate.

On the flip side, the Food & Staples Retailing sector has the weakest earnings growth rate at -1.0%. Sprouts Farmers Market Inc. (-27.1%) and Whole Foods Market Inc. (-14.7%) weak earnings results are bringing the group down.

Exhibit 3: Q4 2016 Estimated Earnings Growth Rates

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Source: I/B/E/S data

Earnings growth winners and losers

The top Q4 2016 earnings growth rates are expected to come from easy comparisons from a year-ago (Exhibit 4). Companies benefiting from holiday related travel — Belmond Ltd., and Expedia Inc. — are on top with 100% and 80.3% earnings growth rates, respectively.

Exhibit 4: Thomson Reuters Strongest Earnings Growth Rate Expectations: Q4 2016

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Source: I/B/E/S data

Weaker outlooks

Meanwhile, Ascena Retail Group and Fred’s are expected to post the weakest earnings growth rates at -355.6%, and -267.3%, respectively. The companies below are also hurting from company specific issues versus sector-wide related difficulty (Exhibit 5).

Exhibit 5: Thomson Reuters Weakest Earnings Growth Rate Expectations: Q4 2016

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Source: I/B/E/S data

SSS Winners and Losers

The Thomson Reuter Same Store Sales Index is expected to register a soft 0.7% SSS growth in Q4 2016 (vs. 1.2% in Q4 2015). Ulta Salon Cosmetics, Finish Line, and Kate Spade are expected to register the strongest results (Exhibit 6). Ulta Salon Cosmetics has been enjoying stronger sales, and margins. As a result, the retailer is expected to register the strongest SSS for Q4 at 13.6%, followed by Finish Line’s 8.3% estimate. Kate Spade is still the strongest in the handbag accessories group and is expected to post a 6.8% SSS, on top of a difficult comparison last year of 14.0% SSS.

Exhibit 6: Thomson Reuters Same Store Sales – Top Estimates Q4 2016

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Source: I/B/E/S data

Weaker performers

Teen retailer The Buckle has the weakest SSS estimate at -11.8%, as it continues to struggle with its women’s fashion merchandise (Exhibit 7). The Express fashion retailer has been out of favor in 2016 and has an -11.1% SSS.

Meanwhile, GNC is losing market share to competitors with better pricing models. The department stores continue to hurt. Sears and Gordmans have been struggling for some time to improve their appeal.

Exhibit 7: Thomson Reuters Same Store Sales – Bottom Estimates Q4 2016

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Source: I/B/E/S data

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