November 13, 2020

U.S. Consumer Spending Preview: Q3 2020

by Jharonne Martis.

U.S. retailers are getting ready to report Q3 2020 earnings. As another wave of COVID-19 looms in the United States, “stay-at-home”-related retailers continue to benefit as consumers’ houses have been converted into offices, gyms and education centers. Those with a solid omnichannel strategy offer shoppers a safe, fast and efficient way of getting their goods and are seeing strong double-digit e-commerce growth. Meanwhile, other retailers continue to struggle as they navigate through uncharted territory.

E-commerce platforms kept retailers running when COVID-19 forced store closures. During most of the 2020 earnings season, retail winners reported record e-commerce sales. For the first half of 2020, U.S. e-commerce sales jumped 29.6% YoY, and are projected to grow even further to 46.1% YoY in the second half of the year, as per Refinitiv IFR. Consumer shopping patterns have definitely been affected by the pandemic, and it’s becoming clear that this trend is here to stay.

Here are some highlights as we head into the Q3 2020 earnings season:

  • The Refinitiv U.S. Retail and Restaurant Q3 earnings index is expected to show a -13.8% change.
  • The Leisure Products and Internet & Catalog Retail sectors have the highest Q3 2020 earnings growth rates at 84.5% and 43.3%, respectively
  • Meanwhile, the Hotels, Restaurant & Leisure Retail has the weakest Q3 2020 estimate of -128.9%.
  • The Refinitiv Same Store Sales index is expected to see a 4.6% growth in Q3 2020, above last year’s 2.7% result.
  • About 43% of retailers expect to post negative SSS due to store closures caused by the pandemic.
  • Only 28 out of 89 retailers in our SSS universe are expected to see positive comps.
  • For the first half of 2020, U.S. e-commerce sales jumped 29.6% YoY, and is projected to grow even further to 46.1% YoY in the second half of the year, as per Refinitiv IFR.

Q3 2020 EARNINGS

The Refinitiv U.S. Retail and Restaurant Q3 earnings index is expected to decline by -13.8%. When looking at the earnings growth rates for Q3 for the 206 retailers tracked by Refinitiv, the Leisure Products and Internet & Catalog Retail sectors have the highest earnings growth rates at 84.5% and 43.3%, respectively (Exhibit 1). On the flip side, the Hotels, Restaurants & Leisure Retail has the weakest anticipated Q3 2020 estimate of -128.9%.

Exhibit 1: The Refinitiv Retail Earnings Growth Rate – Q3 2020

Leisure products winners

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

Within the Leisure Products sector, Mattel Inc. has the strongest result with a 265.4% earnings growth rate. The following companies have also reported stronger-than-expected earnings: Yeti Holdings, Polaris Inc, and Callaway Golf Co. All the companies in this sector beat their earnings estimates.

In the Internet & Catalog Retail sector, Etsy posted the strongest earnings growth rate at 483.3%. Meanwhile, Amazon showed how important online orders were during Covid-19 and posted an impressive 192.4% earnings growth rate, followed by Shutterstock Inc.’s 175.9% actual earnings growth rate. Meanwhile, Expedia (-106.5%) 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. Fourteen of the 43 companies in this group have positive earnings growth rates, which are mostly restaurants. The bulk of hotels and casinos in this sector are expected to post weaker earnings vs. last year. Wynn Resorts Ltd. saw the biggest earnings decline, followed by Ceasars Entertainment.

Seventy percent of companies in our Retail/Restaurant Index have reported Q3 2020 EPS. Of the 145 companies in the index that have reported earnings to date, 90% have reported earnings above analyst expectations, and 10% reported earnings below analyst expectations (Exhibit 2). The Q3 2020 blended earnings growth estimate is -13.8%.

The Q3 2020 blended revenue growth estimate is 3.3%. Seventy eight percent have reported revenue above analyst expectations, and 22% reported revenue below analyst expectations.

Exhibit 2: Refinitiv Proprietary Research Restaurant & Retail Dashboard – Q3 2020

Source: Refinitiv I/B/E/S estimates

Below are the Same Store Sales and Earnings estimates for retailers reporting earnings next week:

Exhibit 3: Same Store Sales and Earnings Estimates/Results – Q3 2020

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

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 see a 4.6% gain in Q3 2020 (Exhibit 4). A 3.0% SSS reflects healthy consumer spending. The 4.6% SSS estimate suggests spending is robust as it’s above the 2.7% result seen in Q3 2019.

It’s important to note that the 2020 results are not an apples-to-apples comparison vs. previous years as many retailers were closed due to shelter in place regulations. As a result, a number of retailers did not report SSS in 2020, while those that reported saw a huge spike in SSS, boosted by key essential items.

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

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

Department stores and other mall stores already had been struggling with weak mall traffic before the coronavirus pandemic and are the most vulnerable. They also happen to be in the bottom Q3 SSS performers (Exhibit 5).

Vince Holding and Steven Madden are expected to post comps of -30% and -24.8%, respectively. Surprisingly, Aritzia 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: Q3 2020

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

Discounters Expected To Be on Top

Only 28 out of 89 retailers in our Same Store Sales universe are expected to see positive comps. Four out of the top ten Q3 Same Store Sales (SSS) estimates are coming from the Home Furnishing and Home Improvement sectors. Consumers continue to invest in improving the stay-at-home experience. As a result, Lovesac has the highest Q3 SSS at 33%, followed by Restoration Hardware’s 17.2% SSS. Consumers continue to fix their homes during quarantine, which is boosting sales at Lowe’s and Home Depot.

The discounters are also benefitting from selling key essential items during the pandemic. BJ’s Wholesale has the strongest SSS estimate in the discount sector at 13.6% and is also benefitting from selling home furniture and merchandise. Costco already reported a 11.4% result, above its 7.8% SSS estimate. Big Lots is expected to post a robust 13.1% SSS, above last year’s -0.1% SSS result.

Exhibit 6: Refinitiv Strongest Same Store Sales Estimates: Q3 2020

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

 

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