by Tajinder Dhillon.
18Q3 earnings season is underway with 69 companies reporting last week ending November 9, 2018. Exhibit 1 provides a summary of reporting results.
Exhibit 1: Earnings Season Results
Of the companies that reported last week, 47% beat EPS expectations and 50% missed EPS expectations. In addition, 52% beat Revenue expectations and 53% missed Revenue expectations.
The company who beat EPS expectations by the largest amount was Banco Bpm SpA (BAMI.MI) with a positive 556% surprise. The company who missed EPS expectations by the largest amount was EDP Energias de Portugal SA (EDP.LS) with a negative -600% surprise.
The company who beat Revenue expectations by the largest amount was Endesa SA (ELE.MC) with a positive 36.3% surprise. The company who missed Revenue expectations by the largest amount was Randgold Resources Ltd (RRS.L) with a negative -15.9% surprise.
Consumer Cyclicals as a sector continues to face a difficult landscape: tougher retail conditions, changing consumer preferences, tighter consumer wallets, and unexpected weather to name a few. We have seen some of these secular trends play out in 18Q3 earnings season as seen in Exhibit 2. With surprise factors of -3% and -18%, both Consumer Cyclicals and Non-Cyclicals are the worst performing sectors when it comes to companies beating EPS expectations.
Exhibit 2: STOXX 600 18Q3 EPS Scorecard
Consumer Cyclicals are also the worst performing sector when looking at 18Q3 growth rates, as the sector is currently experiencing a -10.3% growth rate as of November 6th.
As a result, analysts appear to be most bearish on this sector when looking at Earnings Revision on an aggregate level. Exhibit 3 highlights how EPS Revisions have been trending for both current Full Year (FY1: 2018) and Next Year (FY2: 2019) over a 30-day, 90-day, and 180-day period. Consumer Cyclicals EPS estimates have been revised 5.1% downwards over the last 90 days for both FY1 and FY2. This means analysts are expecting less growth coming from this sector in 2019.
Exhibit 3: STOXX 600 EPS Revisions for FY1 and FY2
Danish charm-bracelet maker Pandora A/S (PNDORA.CO) missed EPS and Revenue this quarter by 15.1% and 5.5% respectively and YoY growth also declined by 27.6% and 4.1% respectively. Since 18Q3 earnings were released on November 6th, the stock has declined by -10% and has lost almost 50% of its market value since the beginning of the year. Lack of product diversity has been one of the main drivers for the poor performance in 2018, as Pandora is playing catch-up to changing consumer behaviour.
“Back in January, we launched our strategy to transform Pandora to a full-range branded jewellery retailer … we were not progressing fast enough on our journey. It has also become clear that our challenges are not only about refreshing our product assortment but also about other aspects of how to service our customers” according to Chairman Peder Tuborgh.
Regarding how Pandora services its customers, newly appointed Co-CEO Jeremy Schwartz provided his plans on how change the customer experience. “Pandora frankly is yet to fully meet customers’ expectations to have a seamless omni-channel journey between their mobile phone, computer, website and stores. Just to remind you, the sorts of things people want nowadays, and of course it changes every day, is they want a site to remember the page, they’ve just looked at. They want to engage 24/7 in a chatbot to sort out issues. And if they go in store and something is not there, they now want the store staff to source online that product and send it immediately to their home.”
Pandora has lowered its full-year revenue guidance to 2-4% growth and plans to reduce the number of new store openings. It’s Earnings before Interest & Tax (EBIT) margin has also dropped from 36.5% to 29.8% over the last 2 years.
If we dive deeper into Exhibit 3 and drill down into the constituents of the Consumer Cyclicals sector, it is no surprise that Pandora is one of the most bearish viewed stocks by analysts, who have been busy revising their EPS estimates down. Pandora’s 18Q4 EPS estimate now comes in at $16.86 a share compared to $17.74 prior to 18Q3 earnings release.
Exhibit 4: STOXX 600 Consumer Cyclicals EPS Revisions