The second quarter of 2017 saw strength among hotel, restaurant and leisure companies, but a sag in earnings growth rates at internet and catalog retailers.
Of the 79 companies in our Thomson Reuters Proprietary Research Restaurant & Retail Universe that have reported earnings to date for Q2 2017, 58% reported earnings above analyst expectations and 59% reported revenue above expectations.
While that’s good news, there were 54 Q2 negative EPS preannouncements issued by retailers and restaurants compared to 19 positive EPS preannouncements.
Indications are that, overall, second quarter earnings are expected to increase 2.5% from Q2 2016.
However, the Thomson Reuters Retail Same Store Sales Index is expected to post a 0.7% SSS growth in Q2 2017 (vs. 0.9% in Q2 2016). Meanwhile, the Thomson Reuters Restaurant Same Store Sales Index is expected to post a stronger 2.8% SSS growth in Q2 2017 (vs. 0.6% in Q2 2016).
Guidance
In addition to the 54 Q2 negative pre-announcements and 19 positive, retailers posted 31 negative and 22 positive revenue forecasts (Exhibit 1). The bulk of the negative guidance (43%) comes from the apparel sector. Guidance is already starting to come in for Q3.
Exhibit 1: Q2 and Q3 2017 Earnings and Revenue Guidance
Source: I/B/E/S estimates
Outlook and trends
Second quarter retail earnings are expected to grow 2.5% over Q2 2016. The hotels, restaurant & leisure retail, and specialty retail sectors are expecting the highest earnings growth rates for the quarter, while the internet & catalog retail and leisure products sectors have the weakest negative anticipated growth rates compared to Q2 2016 (Exhibit 2).
The hotel, restaurant & leisure group is expected to see earnings grow by 9.3%, led by Belmond Ltd.’s 185% estimated earnings growth, followed by Chipotle’s strong 166.7% jump in earnings.
The specialty retail sector is expected to see earnings grow by 5.9%. The sector received a boost from Office Depot’s 163.3% earnings growth rate, driven by cost cuts, followed by Big Sporting Goods Corp. 111.1% estimated growth rate, which is benefitting from competitors’ store closures.
Surprisingly, the internet & catalog retail sector has the weakest earnings growth rate at -29.2%. The weakness is coming from Amazon’s 77.5.0% drop in earnings growth rate. After missing consensus estimates, and lowering its Q3 EPS guidance, every analyst polled by Thomson Reuters has lowered Amazon’s Q3 earnings estimates. One highly rated analyst with a very accurate track record believes its Q3 EPS will be as low as -$0.16. Despite this, StarMine Earnings Quality models show solid accruals and cash. Moreover, Amazon has robust StarMine credit scores. On the flip side, Netflix already posted the strongest earnings growth within the group at 66.7%.
Exhibit 2: Q2 2017 Earnings Growth: Retail Industries
Source: I/B/E/S estimates
Expected earnings growth winners
Of the 141 companies in the Thomson Reuters Retail and Restaurant group that have yet to report Q2 2016 earnings, Children’s Place Inc. and Belmont MDC Holdings Inc. are on top with 7616.6%, and 185.0% estimated earnings growth rates, respectively.
It’s evident from the expected list of winners that home builders and home improvement groups are still profiting from the strong housing trend.
Exhibit 3. Thomson Reuters Strongest Q2 Earnings Growth Rates
Source: I/B/E/S estimates
Losers
G-III Apparel Group Ltd., Under Armour and Fossil Group Inc. are on track to post the weakest earnings growth rates, at -2814.3%, -697.7% and -680.3%, respectively. Nine of the ten weakest earnings growth rates are coming from the apparel group. The retailers below sell their merchandise in department stores, or in stand-alone stores in malls, which have been hurting from weak mall traffic, and thus store closures.
Exhibit 4. Thomson Reuters Weakest Q2 Earnings Growth Rates
Source: I/B/E/S estimates
Same store sales outlook
We expect an anemic 0.7% SSS growth in Q2 2017 (vs. 0.9% in Q2 2016), suggesting that second quarter 2017 sales were slightly weaker than a year ago. Despite facing easy comparisons from a year ago, department stores are expected to do worse this year with a -3.5% SSS estimate.
Exhibit 5. Thomson Reuters Same Store Sales Index Q2 2017 EST VS. Q2 2016
Source: I/B/E/S estimates
Cosmetics and clothing
Cosmetic retailer Ulta continues to sport the strongest SSS estimate at 12.0%, a significantly strong estimate considering last year’s robust 14.4% result. A 3.0% gain reflects healthy consumer spending.
J.Jill customers are paying full price for the merchandise in a time when consumers are value-oriented. Another standout includes Coach which is on track to post its fifth consecutive quarter of positive SSS. Finally, both Home Depot and Lowe’s continue to benefit from strength in the housing market.
Exhibit 6. Thomson Reuters Same Store Sales – Top Estimates Q2 2017
Source: I/B/E/S estimates
Retail SSS losers
Meanwhile, about half of retailers (49%) including Cato Corp., Guess, Hibbett Sporting Goods, and Michael Kors are all expected to see a drop in Same Store Sales. Cato has the weakest SSS estimate at -12.5% and analysts polled by Thomson Reuters remain bearish on the retailer. Moreover, StarMine Price Momentum shows the stock price momentum is not in the company’s favor.
Exhibit 7. Thomson Reuters Same Store Sales – Bottom Estimates Q2 2017
Source: I/B/E/S estimates
Restaurant SSS index
We expect a 2.8% SSS growth in Q2 2017 (vs. 0.6% in Q2 2016), indicating restaurant sales picked up from a year ago. The quick service sector is the strongest, while casual dining (ex-DRI) is still weak.
Exhibit 8. Thomson Reuters Restaurant Same Store Sales Sectors Q2 2017
Source: I/B/E/S estimates
Meanwhile, Domino’s Pizza already reported the strongest SSS of 11.2% for Q2 2017, above its 8.9% final estimate (Exhibit 9). On the flip side, Sonic has the weakest SSS result at -3.2% SSS. Of the fifteen restaurants that have reported 2Q Same Store Sales, 53% exceeded estimates, while 47% missed.
Exhibit 9. Thomson Reuters Restaurant Same Store Sales Scorecard – 2Q 2017
Source: I/B/E/S estimates
Restaurant SSS winners
Texas Roadhouse has the strongest SSS estimate at 3.4%, followed by Dave Busters Entertainment and Wendy’s International at 3.2% and 2.9%, respectively.
Exhibit 10. Thomson Reuters Restaurant Same Store Sales – Top Estimates Q2 2017
Source: I/B/E/S estimates
Restaurant SSS losers
On the flip side, Fiesta Restaurant Group has the weakest SSS estimate at -7.5%, followed by Papa Murphy’s Holdings at -3.6%. According to StarMine, Fiesta Restaurant has credit issues and earnings quality is weak.
Exhibit 11. Thomson Reuters Restaurant Same Store Sales – Bottom Estimates Q2 2017
Source: I/B/E/S estimates
