Seventy-four percent of companies in our Retail/Restaurant Index have reported Q2 2018 EPS. Of the 157 companies in the index that have reported earnings to date, 73% have reported earnings above analyst expectations, 7% reported earnings in line with analyst expectations and 20% reported earnings below analyst expectations. The Q2 2018 blended earnings growth estimate is 28.8%.
Kohl’s Corp.
Kohl’s beat Q2 2018 earnings, revenue and same store sales estimates. Yet, the stock price fell today, as SSS has been decelerating from the previous two quarters. The retailer also raised its full year earnings guidance, but that wasn’t enough to help the stock price which fell today. Same store sales came in at 3.1% stronger than expectations, but below its previous two quarters results.
Exhibit 1: Kohl’s Same Store Sales Results
Source: Eikon
Still, Kohl’s continues to be one of the strongest retailers in the department store sector. In a time when the bulk of department stores continue to close doors, Kohl’s posted a 40.4%jump in earnings vs. last year. Looking forward to the remainder of the year, it is expected to continue posting double digit earnings growth. Analysts polled by Thomson Reuters are also bullish that the retailer will have a healthy quarter based on encouraging back-to-school traffic, demand for women’s and active clothing, favorable weather, and on-trend merchandise selection. What’s more, the retailer’s off-mall location has protected it from weak mall traffic. Its loyalty program is also a favorite among its shoppers.
What’s more, in the earnings call today, Kohl’s was very pleased about its partnership with Amazon. The retailer said both their, and Amazon’s customers are excited and have responded well. The partnership has been expanded to about 100 locations now, a sign that both parties are getting the desired results. Analysts polled by Thomson Reuters are encouraged by this association to drive traffic to stores and online. They believe Kohl’s is ahead of its peer department stores because of this association, and the data they are gathering about local consumer behavior in these markets.
Gap, Inc.
Gap is on track to post its sixth consecutive quarter of positive SSS. For Q2 2018, the retailer is looking at a 1.5% SSS estimate, above last year’s 1.0% SSS result. Old Navy growth slowed last quarter, however this quarter sales are expected to improve. Old Navy continues to be Gap’s strongest-performing division with a 4.2% SSS estimate. What’s more, the retailer offered fewer promotions in the previous quarter. Its Banana Republic division is on track to post three consecutive quarters of comp improvement. It is expected to see a 3.3% estimate, above last year’s 5.0% SSS result as management has done a better job in improving its fashion offerings.
Gap is on track to post a 23% jump in earnings vs. last year. Looking forward to the remainder of the year, it is expected to continue posting double digit earnings growth. Gross Margin is expected to improve to 39.3% as Old Navy merchandise has experienced a decrease in promotions. Its Athleta division continues to benefit from the strong athleisure trend.
Exhibit 2: Gap Inc. Earnings Growth Rate
Source: I/B/E/S data
Shoppers love getting rewarded for their continued business. And, Gap’s loyalty program “Bright Rewards” surpassed one million members underlining the importance for retailers to incorporate reward programs. Sephora’s loyalty program is a very popular one, and last week alone Macy’s smashed their earnings expectations and acknowledged that their loyalty program have resulted in repeat and increased business from their loyal shoppers, and on top of them helped them gain about a million shoppers that were brand new. So, it’s a great way of increasing for retailers to increase their customer base and increase store traffic.
Target Corp.
Target is expected to report earnings on Aug. 22. In the past the retailer has reported stronger traffic than Walmart. It will be interesting to see if Target can surpass Walmart’s 2.2% jump in customer traffic, and 2.3% in higher spending. In order to better compete with Amazon and Walmart, Target has recently expanded its one-day delivery in various metro areas. It most recently expanded to Portland, Me.
Target has been working on redesigning its brick and mortar stores, coming up with new brands and expanding same-day delivery options. All these strategies are necessary for retailers to compete in the current environment. Target is on track to post its fifth consecutive quarter of positive SSS. In the previous two quarters the retailer posted comps of 3% and higher. This quarter comps are expected to improve to a 4.0% SSS, above its 1.3% SSS result from last year suggesting these initiatives are paying off. Earnings are also expected to see a jump of 13.7%, and are expected to remain in the double digit growth for the remainder of the year.
The StarMine Price Momentum high score of 84 tells us that the retailer has positive price stock momentum in its favor. Likewise, looking at the StarMine Earnings Quality model, Target scores an 81 out of a possible 100. Its high score suggests that profits could be from sustainable sources. The company’s cash flow and operating efficiency components also suggest the company is a top performer in these areas.
Exhibit 4: Target StarMine Model Scores
Source: Eikon
In an effort to stay current and relevant, a number of retailers including Target have been heavily investing significantly into e-commerce channel. This in return has been raising costs and eating up profits. As a result, the multiline sector has been hurting and Target’s operating margin has been on the decline for the past six quarters. Investors will be looking to see if costs have stabilized and higher gross profit margins are in this week’s earnings report.
Exhibit 5: Target Operating Profit Margin
Source: Eikon
