October 14, 2019

U.S. Consumer Spending Preview: Q3 2019

by Jharonne Martis.

The Refinitiv U.S. Retail and Restaurant Q3 earnings index is expected to rise 2.5% — considerably below last year’s 18.6% Q3 2018 earnings growth. When looking at the earnings growth rates for Q3 for the 209 retailers tracked by Refinitiv, the Hotels, Restaurant & Leisure sector has the highest earnings growth rate at 7.1%. On the flip side, the Household Durables has the weakest anticipated growth compared to Q3 2019.

The Household Durables earnings growth rate is being affected by negative earnings growth expectations among homebuilding and household appliances companies. The homebuilding companies William Lyon Homes and Toll Brothers are expected to post weaker earnings vs. last year and are bringing the sector down with a -55.9% and -36.6% estimated earnings growth rates. Likewise, iRobot, which makes high-tech household appliances, is expected to see -52.1% earnings growth vs. last year. Fourteen of the 28 companies in this group have negative earnings growth rates.

In the Hotels, Restaurant & Leisure sector, Carnival Corp. (11.4%), and Darden Restaurants (3.0%) already posted higher earnings compared to a year ago. Meanwhile, Red Robin Gourmet Burgers Inc. (-240.3%) has the weakest EPS growth estimate in the sector.

Exhibit 1: The Refinitiv Retail Earnings Growth Rate – Q3 2019

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

Q3 2019 Earnings and Revenue Guidance

Retailers are getting ready to report Q3 earnings and have been heavily discussing the issue of China tariffs this year. It’s come up in 321 earnings calls, and that might not be the end of it.

Moreover, retailers are also warning us not to expect much from them in the upcoming quarters. Q3 2019 preannouncements have become less positive compared to a year ago. To date, there have been 39 negative EPS preannouncements for Q3 2019 compared to 15 positive preannouncements, this is below the 23 positive preannouncements posted the same time last year. Likewise, when looking at revenue, there have been 29 negative preannouncements for Q3 2019 compared to 23 positive revenue preannouncements, down from 39 positive preannouncements last year (Exhibit 2). Accordingly, analysts polled by Refinitiv have been lowering Q3 estimates.

Exhibit 2: The Refinitiv Retail Earnings/Revenue Guidance – Q3 2019
Source: I/B/E/S data from Refinitiv

Retail Sales

Retailers are facing very tough comparisons from a year ago, when consumer spending was robust and the sector posted its strongest Same Store Sales (SSS) in Q1 2018. The Refinitiv SSS index is expected to see 2.6% growth in Q3 2019. A 3.0% SSS reflects healthy consumer spending. The 2.6% SSS estimate is below the 4.2% result seen in Q3 2018.

Exhibit 3: Refinitiv Same Store Sales Index: 2017 – Present

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

Sector Slowdown

The two sectors in retail that continue to see a slowdown in spending are the Department and Apparel groups (Exhibit 4). The Department and Apparel group’s Same Store Sales continue to deteriorate from last year. For Q3 2019, the Department group is expected to post a -0.3% SSS, considerably below its 2.9% SSS result last year. And, the same can be said for the Apparel group, which is expected to post a 1.5% SSS for Q3 2019, below last year’s 3.9% SSS result.

Exhibit 4: Refinitiv Same Store Sales Weakest Indices: 2018 – Present

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

Pier One already missed its -10.0% SSS estimate, and posted a -12.6% Q3 2019 SSS result. JC Penney continues to have the weakest SSS estimate among the department stores at -7.8% (Exhibit 5) and is haunted by severe debt. The department store has the lowest score of 1 on the StarMine Combined Credit Risk Model, the most comprehensive StarMine credit model. According to StarMine, there’s a high probability of credit default. Meanwhile, mall stores have been out of favor and continue to experience weak store traffic. These stores include Gamestop, Kirkland’s, Express, Vitamin Shoppe, and Chico’s Inc., with comp estimates of -13.8%, -9.5%, -6.2%, -6.0% and -3.9%, respectively.

Exhibit 5: Refinitiv Weakest Same Store Sales Estimates: Q3 2019 Source: I/B/E/S data from Refinitiv

Sector Improvement

Consumer spending was strong in 2018, and as a result all retail sectors are facing difficult comparisons from a year-ago. Despite this, the Home Improvement continues to show robust results, and is expected to post an impressive 4.2% Q3 2019 SSS, above last year’s 3.5% SSS result (Exhibit 6).

Exhibit 6: Refinitiv Strongest SSS Sector – Home Improvement: 2018 – Present

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

The Lovesac company, dubbed the “world’s most adaptable couch,” has the strongest SSS estimate in our retail universe with a 28.8% SSS comp. In apparel, Lululemon is on top benefiting from the hot athleisure trend, with a 13.6% SSS estimate. Meanwhile, consumers are buying apparel at Aritzia, and it has a 7.3% SSS estimate, despite facing an impressive 11.5% Q3 2018 SSS result. Meanwhile, Costco is on top among the discounters and already reported a 5.2% result, above its 5.1% SSS estimate.

Exhibit 7: Refinitiv Strongest Same Store Sales Estimates: Q3 2019

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

Consumer confidence

Consumer confidence peaked in March/April of 2018, and then deteriorated in 2019. In fact, the index showed an overall drop of 3.9 points over the course of nearly a year and a-half. Among the total U.S. population, the Primary Consumer Sentiment Index (PCSI) for August 2019 (60.9) and for September 2019 (58.9) averages 59.8; the PCSI for April 2018 (63.6) and May 2018 (63.8) averaged 63.7.

The decline is far sharper among the following segments of the U.S. public:

  • Aged 35-49: – 6.6 (compared to -2.6 among those aged 18-34 and -2.9 among those aged 50-74)
  • High school education or less: -6.3 (compared to -0.1 for those with some college and -1.9 for those with a college degree)
  • Household income of $75,000 or more: -5.2 (compared to -4.1 for those with an income of less than $25,000 and -2.7 for those with an income of $25,000 to less than $75,000)
  • Not married: -5.2 (compared to -2.9 among those married)
  • Women: -4.8 (compared to -2.9 among men)

The trend is most negative on questions pertaining to expectations and about comfort-making purchases. On most metrics, the drop exceeds 10 points among those who are 35-49 or have only a high school education and it exceeds 8 points among women.

Exhibit 8: Consumer Confidence Continues to Decline in September  Source: I/B/E/S data from Refinitiv

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