August 11, 2020

U.S. Consumer Spending Preview: Q2 2020

by Jharonne Martis.

Retailers are getting ready to report Q2 2020 earnings. As they continue to navigate through uncharted territory, some are in financial distress while those with a solid omnichannel strategy are seeing strong double-digit e-commerce growth.

E-commerce platforms kept retailers running when COVID-19 forced store closures. During the Q1 2020 earnings season, retail winners reported record e-commerce sales. For Q2, retailers were signaling strong ecommerce sales, such as a 470% gain at Shoe Carnival and 200% at Hibbett Sports. Shoppers are gravitating to online shopping and mobile devices for deliveries and curbside pickup. Consumer shopping patterns have definitely been affected by the pandemic, and the results are making it clear that this trend is here to stay.

Here are some highlights as we head into the Q2 2020 earnings season:

  • The Refinitiv U.S. Retail and Restaurant Q2 earnings index is expected to show a -55.9% change.
  • The Household Products and Internet & Catalog Retail sectors have the highest Q2 2020 earnings growth rates at 11.3% and 6.7%, respectively
  • Meanwhile, the Hotels, Restaurant & Leisure Retail has the weakest Q2 2020 estimate of -194.3%.
  • The Refinitiv SSS index is expected to contract -0.5% in Q2 2020, below last year’s 2.5% result.
  • About 56% of retailers expect to post negative SSS due to store closures caused by the coronavirus pandemic.
  • Only 16 out of 89 retailers in our Same Store Sales (SSS) universe are expected to see positive comps.

Q2 2020 earnings

The Refinitiv U.S. Retail and Restaurant Q2 earnings index is expected to be decline by -55.9%. When looking at the earnings growth rates for Q2 for the 206 retailers tracked by Refinitiv, the Household Products and Internet & Catalog Retail sectors have the highest earnings growth rates at 11.3% and 6.7%, respectively (Exhibit 1). On the flip side, the Hotels, Restaurants & Leisure Retail has the weakest anticipated Q2 2020 estimate of -194.3%.

Within the Household Products sector, Central Garden & Pet Co. has the strongest result with a 65% earnings growth rate. The following companies have also already reported stronger-than-expected earnings: Energizer Holdings, Church & Dwight Co, and Kimberly-Clark Corp. On the other hand, WD-40 is the only company with a negative earnings growth rate of -18.5% for the quarter.

In the Internet & Catalog Retail sector, Etsy posted the strongest earnings growth rate at 435.7%. Meanwhile, Amazon showed how important online orders were during Covid-19 and posted an impressive 97.3% earnings growth rate, followed by Shutterstock Inc.’s 87.9% actual earnings growth rate. Meanwhile, Expedia (-331.1%) has the weakest EPS growth actual in the sector as consumers were not booking travel flights during the pandemic. Seven of the 10 companies in this group have positive earnings growth rates.

The Hotels, Restaurant & Leisure Retail earnings growth rate is being affected by negative earnings growth expectations. Only four of the 43 companies in this group have positive earnings growth rates, which are from restaurants. All of the hotels and casinos in this sector are expected to post weaker earnings vs. last year. MGM Resorts International saw the biggest earnings decline, followed by Carnival Corp.

Exhibit 1: The Refinitiv Retail Earnings Growth Rate – Q2 2020

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

Sixty seven percent of companies in our Retail/Restaurant Index have reported Q2 2020 EPS. Of the 137 companies in the index that have reported earnings to date, 79% have reported earnings above analyst expectations, and 21% reported earnings below analyst expectations. The Q2 2020 blended earnings growth estimate is -55.9%.

The Q2 2020 blended revenue growth estimate is -6.5%. Seventy five percent have reported revenue above analyst expectations, and 25% reported revenue below analyst expectations.

Exhibit 2: Refinitiv Proprietary Research Restaurant & Retail Dashboard – Q2 2020

Source: Refinitiv I/B/E/S estimates

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

Exhibit 3: Same Store Sales and Earnings Estimates/Results – August 2020

Retail sales

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). The Refinitiv SSS index is expected to contract by -0.5% in Q2 2020 (Exhibit 4). A 3.0% SSS reflects healthy consumer spending. The -0.5% SSS estimate suggests spending is dismal as it’s below the 2.5% result seen in Q2 2019.

The -0.5% SSS estimate is also below the 6.1% result for Q1 2020. It’s important to note that this Q1 result is not an apples-to-apples comparison vs. previous quarters as many retailers were closed due to shelter in place regulations. As a result, a number of retailers did not report Q1 SSS, while those that reported saw a huge spike in SSS boasted by key essential items.

Exhibit 4: Refinitiv Same Store Sales Index: 2017 – Present

Due to the pandemic, the bulk of retailers had to keep a number of their stores closed during the second quarter. As a result, a number of stores are in financial distress. Department stores and other mall stores had already been struggling with weak mall traffic before the coronavirus pandemic and are the most vulnerable. Therefore, they also happen to be in the bottom Q2 SSS performers (Exhibit 5). Regis Corp. and Vince Holding are expected to post comps of -89.2% and -26.1%, respectively. Surprisingly, Aritzia is also expected to post a negative comp of -48.1%. This apparel retailer is facing difficult SSS comparisons from a year ago, and traditionally reports robust comp growth.

Exhibit 5: Refinitiv Weakest Same Store Sales Estimates: Q2 2020

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

Discounters expected to be on top

Only 16 out of 89 retailers in our Same Store Sales universe are expected to see positive comps. Hibbett Sports is on top with a 72.7% SSS estimate (Exhibit 6). The sports retailer had pre-announced SSS of 70% for the quarter boosted by a 200% growth in digital sales.

Six out of the top ten Q2 Same Store Sales (SSS) estimates are discounters. The discounters are benefitting from selling key essential items during the pandemic. Big Lots has the strongest SSS estimate in this sector at 25.1% and is also benefitting from selling home furniture and merchandise. Costco already reported a 4.8% result, below its 5.7% SSS estimate. Target is expected to post a robust 6.1% SSS, above last year’s 3.4% SSS result.

Similarly, consumers continue to fix their homes during quarantine, which is boosting sales at Home Depot and Lowe’s. Shoe Carnival’s digital sales are lifting its Q2 SSS estimate to 9.8%, above last year’s 1.4% result.

Exhibit 6: Refinitiv Strongest Same Store Sales Estimates: Q2 2020   

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

 

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