by Jharonne Martis.
Retailers are getting ready to report Q1 2020 earnings. As they navigate through uncharted territory, many are withdrawing their earnings guidance. The coronavirus pandemic has also prolonged retail store closures all over the world. However, some U.S. states are reopening for business, including such retailers as Macy’s and Best Buy.
However, consumer shopping patterns have definitely been affected by the pandemic, underlying the importance of having a solid omnichannel experience. Shoppers are gravitating to online shopping and mobile devices for deliveries and curbside pickup.
Here are some highlights as we head into the first earnings season of 2020:
Q1 2020 earnings
The Refinitiv U.S. Retail and Restaurant Q1 earnings index is expected to be down by -25.6%. When looking at the earnings growth rates for Q1 for the 211 retailers tracked by Refinitiv, the Household Durables and Household Products sectors have the highest earnings growth rates at 14.8% and 14.4%, respectively (Exhibit 1). On the flip side, the Multiline Retail has the weakest anticipated Q1 2020 growth estimate of -106.2%.
The Homebuilding sub-industry is giving a boost to the Household Durables sector. The following companies have already reported stronger-than-expected earnings Meritage Homes Corp, Tempur Sealy International Inc., KB Home, and Lennar Corp. Twelve of the 24 companies in this group have positive earnings growth rates.
In the Household Products sector, Energizer Holdings is bringing the sector up with an 80% estimated growth rate, followed by Church & Dwight Co. 18.6% actual earnings growth rate. Meanwhile, WD-40 (-8.8%) has the weakest EPS growth actual in the sector. Eight of the nine companies in this group have positive earnings growth rates.
The Multiline Retail earnings growth rate is being affected by negative earnings growth expectations. Nine of the 10 companies in this group have negative earnings growth rates. All of the department stores are expected to post weaker earnings vs. last year. Nordstrom’s earnings are expected to see the biggest decline, followed by Kohl’s and Macy’s with -511.3%, -381.5% and -371.6% estimated earnings growth rates.
Exhibit 1: The Refinitiv Retail Earnings Growth Rate – Q1 2020
Source: I/B/E/S data from Refinitiv
Of the 136 companies in the Refinitiv Retail and Restaurant group that have yet to report Q1 2020 earnings, Vista Outdoor Inc. and Lumber Liquidators Holdings Inc. have the strongest estimated earnings growth rates of 483%, and 123%, respectively (Exhibit 2).
Exhibit 2: Refinitiv Strongest Earnings Growth Rate Results: Q1 2020
The bulk of companies are obviously being hit by the COVID-19 pandemic. As a result, Signet Jewelers Ltd. and Zumiez Inc. are on track to post the weakest earnings growth rates at -3167%, and -1519%, respectively (Exhibit 3).
Exhibit 3: Refinitiv Weakest Earnings Growth Rate Results: Q1 2020
Source: Refinitiv I/B/E/S estimates
Greater transparency in China’s economy
The coronavirus pandemic has put more pressure on China for greater transparency. Wall Street has long been skeptical about the accuracy of China’s economic and GDP data. Because of this doubt, we dig deeper to gain better insight into true economic activity, and we turn to macro research data from Fathom Consulting, which can be found in Eikon Datastream.
They have built the China Momentum Indicator (CMI) proprietary index which combines twelve measures of economic activity, including retail sales, unoccupied housing and net trade – among many others. According to the CMI, China’s economy continues to slowdown more drastically that the Chinese government has led to believe. Now with the coronavirus outbreak, this is becoming a big drag on the economy (Exhibit 4). Many retailers have closed down manufacturing in China, and its affected exports to the U.S., and earnings guidance for the upcoming quarter.
Exhibit 4: Fathom China Momentum Indicator: 2006 – 2020
Reopening – omnichannel is key
The coronavirus pandemic has prolonged retail store closures all over the world. And after a few months, many U.S. states are reopening for business, including a few retailers like Macy’s and Best Buy. As they reopen social distancing, mask and cleaning precautions are being taken.
However, consumer shopping patterns have definitely been affected by the pandemic. As stores have already reopened in Asia, Nike tells us that store traffic is at same levels seen prior to the COVID-19 outbreak. Despite this, shoppers don’t feel comfortable buying in stores and are going online to finalize their purchase.
This means that the pandemic has definitely underlined the importance of having a solid omnichannel experience, as shoppers gravitate online and use mobile devices for curbside pickup and deliveries. Recently, Best Buy said that online sales grew over 250% over last year, and half of the orders were for deliveries and the other half for curbside pickup.
Moreover, Best Buy understands that health and wellness are a top priority for consumers and thus is only letting shoppers in by appointment only after being approved through a call from their customer center. The retailer has strict regulations set in place to allow customers to shop at its stores.
Meanwhile, Macy’s says it plans to reopen its stores. The department stores have been most vulnerable for some time now. Prior to COVID-19, department stores had been struggling with weak mall traffic, so the sense of urgency to drive store sales is more pronounced for them. Macy’s alone is expected to see a decline of -371.6% year over year in Q1 earnings.
Retailers are facing very tough comparisons from a year ago, when physical stores were open and consumer spending was healthy and the sector posted strong Same Store Sales (SSS) in Q1 2020. The Refinitiv SSS index is expected to contract -0.1% in Q1 2020. A 3.0% SSS reflects healthy consumer spending. The -0.1% SSS estimate suggests spending is dismal as it’s below the 2.8% result seen in Q1 2019.
About 56% of the retailers in our universe are expected to post negative SSS due to store closures caused by the coronavirus pandemic. Despite this, the Home Improvement sector continues to show robust results and is expected to post an impressive 4.4% Q4 2019 SSS, above last year’s 2.6% SSS result. Likewise, the Discounters and Drug stores are the only sectors expected to post positive comps at 5.1% and 3.5%, respectively.
Department stores and other mall stores had already been struggling with weak mall traffic before the coronavirus pandemic and are the most vulnerable. JC Penney and Macy’s are expected to post comps of -33.9% and -26.1%, respectively. Surprisingly, American Eagle is also expected to post a negative comp of
-21.1%. This teen retailer’s comps have always received a boost from its Aerie division, which traditionally reports double-digit comp growth. Meanwhile, Bed Bath & Beyond registered a -5.6% SSS, better than its -6.3% SSS estimate.
Exhibit 6: Refinitiv Weakest Same Store Sales Estimates: Q1 2020
Home improvement trend is strong
Only 14 out of 90 retailers in our Same Store Sales universe are expected to see positive comps. The Lovesac company, dubbed the “world’s most adaptable couch,” consistently has the strongest SSS estimate in our retail universe with a 23.4% SSS comp. This is remarkable considering that it is facing difficult comparison from a year-ago at 43.5%. The discounters are benefiting from selling key essential items during the pandemic. Costco is on top among the discounters and already reported an 8.9% result, above its 6.6% SSS estimate. Target is expected to post a robust 7.7% SSS, above last year’s 4.8% SSS result.
Similarly, CVS is expected to see a 3.5% SSS. Meanwhile consumers are fixing their homes during quarantine and boosting sales at Home Depot and Lowe’s. When it comes to apparel, consumers are gravitating towards Aritzia with a SSS estimate of 7.0%, above last year’s 5.5% result.
Exhibit 7: Refinitiv Strongest Same Store Sales Estimates: Q1 2020