August 13, 2019

Q2 2019 Retail Scorecard – Update

by Jharonne Martis.

Sixty nine percent of companies in our Retail/Restaurant Index have reported Q2 2019 EPS. Of the 144 companies in the index that have reported earnings to date, 69% have reported earnings above analyst expectations, 9% reported earnings in line with analyst expectations and 22% reported earnings below analyst expectations. The Q2 2019 blended earnings growth estimate is 1.9%.

 The Q2 2019 blended revenue growth estimate is 1.9%. Sixty-one percent have reported revenue above analyst expectations, 1% matched and 38% reported revenue below analyst expectations.

Exhibit 1: Refinitiv Earnings Dashboard

Source: I/B/E/S data from Refinitiv

Here are the Same Store Sales and Earnings estimates for retailers reporting earnings this week:

Exhibit 2: Same Store Sales and Earnings Expectations/Results – Week of Aug. 13, 2019

Source: I/B/E/S data from Refinitiv

Walmart

Walmart is set to report Q2 earnings this week. The retailer has done a great job maintaining and upgrading its site, offering more products, and enhancing its offerings. It continues to expand its international omnichannel presence, including Mexico. Refinitiv is looking at a 2.1% SSS growth, suggesting traffic and digital growth was healthy in Q2.

Exhibit 3: Walmart Ecommerce Sales

Source: I/B/E/S data from Refinitiv

Trade Wars: Retailers at Risk

There’s been concern about a new 10% tariff due to be imposed on $300 billion in Chinese imports. Tariffs have recently been delayed for some Chinese goods until December. As big retail names are scheduled to report Q2 earnings, Wall Street is wondering which retailers will be more vulnerable to the increased tariffs.

At Risk

Manufacturing

Below is a table of the most vulnerable retailers to tariffs, since many of their products are sourced and manufactured in China:

Exhibit 4: Retailers with Products Sourced/Manufactured in China

Source: I/B/E/S data from Refinitiv

Department stores

Department stores sell brands such as Ralph Lauren and Calvin Klein, which are mostly manufactured in China, and therefore will be hit by tariffs. This sector has been struggling for some time and increased costs can be very detrimental.

Potential retaliation

If China decides to tighten control on foreign companies, retailers driving revenues in China including Tiffany’s, Tapestry, Canada Goose and Abercrombie & Fitch are likely to take a direct hit.

Bankruptcy woes

According to the StarMine Combined Credit Risk (CCR) model, the most comprehensive StarMine credit model, the department stores may be in danger of default if hit with extra costs. JC Penney has the lowest score of 1 on the StarMine Combined Credit Risk (CCR) model, the most comprehensive StarMine credit model (Exhibit 5). Its calculation of the probability of default maps to an implied credit rating of CC to company debt.

Fifteen out of the 24 most vulnerable retailers rank in the bottom quartile of the StarMine CCR model score.  These scores correspond to implied credit ratings of BBB- or worse, suggesting these stores are not financially stable. For example, Express, Inc. has a score of 5 corresponding to a B implied credit rating, according to the model. If hit with higher costs, those scores would fall lower, making the danger of default greater. Five of these retailers are department stores, suggesting they might take the biggest hit first.

Exhibit 5: StarMine Credit Combined Risk Model Scores for Retailers

Source: StarMine by Refinitiv

This could cause retailers to continue closing stores and laying off staff. What’s frightening is that consumer spending was robust in 2018 and has slowed down in 2019 – a time when retailers are still struggling, leaving malls, or closing stores. If a retailer can’t make it now, just imagine if an all-out trade war causes a recession. That would be a bigger threat to retailers than the direct impact tariffs have on consumer behavior – especially for department stores.

Layoffs or higher prices?

During the last recession, retailers did lay off many workers. Consumer spending and consumer confidence has slowed down from robust 2018 results. Thus, passing on higher costs to the consumer will only further reduce product demand. If consumers are hit with further price hikes, they are likely to put their hands in their pockets and hold back on spending. In a recession, retailers could institute layoffs.

Exhibit 6: Refinitiv Same Store Sales Index

Source: I/B/E/S data from Refinitiv

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