March 16, 2022

Q4 2021 U.S. Retail Scorecard – Update March 16, 2022

by Jharonne Martis.

What commodity volatilities mean for consumers

Ninety-two percent of companies in our Retail/Restaurant Index have reported Q4 2021 EPS. Of the 186 companies in the index that have reported earnings to date, 74% have reported earnings above analyst expectations, 3% matched and 24% reported earnings below analyst expectations. The Q4 2021 blended earnings growth estimate is 48.4%.

The Q4 2021 blended revenue growth estimate is 13.5%. Seventy percent have reported revenue above analyst expectations, and 30% reported revenue below analyst expectations.

Exhibit 1: Refinitiv Earnings Dashboard

Source: I/B/E/S data from Refinitiv 

Rising commodity prices

Since the pandemic, The Refinitiv / Ipsos Consumer Sentiment Index has been very volatile over the past two years. However, the latest reading shows an improvement as Americans adjust to the decline of the COVID-19 omicron variant. This is a positive indicator, given all the other negative macroeconomic factors currently affecting the consumer.

Post-COVID inflation has already been passed on to customers, and rising commodity prices are pressuring consumers’ incomes. The initial inflation increase in spending was already financed by a decline in the personal saving rate, which has come down from 8.2% to 6.4%. This is its lowest reading since December 2013. Meanwhile, real per capita disposable income posted six consecutive declines and is down 0.5%.

The volatility in commodity prices, combined with supply chain disruption, has investors questioning how long companies can continue to pass on those costs to consumers. If they feel their incomes continue to be squeezed by inflation, they will cut down on discretionary spending. This is already evident in the Refinitiv retail earnings forecasts for the current quarter.

The Refinitiv retail earnings index is expected to see a 48.4% growth in Q4 2021, suggesting retailers had a good holiday season. However, the index is projected to drop to a -1.4% growth in Q1, suggesting a slowdown in consumer spending for the first quarter of 2022. The biggest drop in spending is expected among the department stores/mall stores, apparel, and specialty retail.

Consumers are trading down

As per Refinitiv IFR data, inflation is expected to loom for the first half of 2022. Despite higher retail prices, January U.S. retail sales and Walmart’s Q4 financial results are telling us that the consumer remained engaged in the beginning of the year.

However, retailers also gave us signs that the consumer is trading down. Despite inflation, Walmart saw strong consumer demand. The retailer attributed the rise in sales to growing market share in food and consumables. As a result, store traffic rose 3.1%, and Sam’s membership income grew by 9.1%. This membership is also being driven by cheaper prices at the pump.

Accordingly, discounters are better poised to benefit in an inflationary environment, compared to other retailers. Discounters are telling us that they continue to gain market share in groceries as middle-class consumers seem to become more price conscious.

Additionally, consumers are gravitating towards the discounters for other discretionary items, including apparel at Walmart, swimsuits and luggage sets at Target. These items would traditionally be purchased at mall stores.

Guidance

Currently, retailers are reporting Q4 2021 earnings.  Of the 186 companies in the retail/restaurant index that have reported Q4 2021 earnings, 145 mentioned inflation, and 175 mentioned the supply issues. Accordingly, the discounters are better poised to benefit in an inflationary situation compared to other retailers.

Retailers are also warning us not to expect much from them for the current quarter. In addition to the 17 Q12022 negative preannouncements and seven positive for EPS, retailers posted 25 negative and sixteen positive revenue forecasts (Exhibit 1). The bulk of the Q1 2022 negative guidance (41.2%) comes from the household durables sector.

Exhibit 2: Q1 2022 Earnings and Revenue Guidance

Source: Refinitiv I/B/E/S

Similarly, when looking at equities worldwide, the consumer related sectors are being downgraded the most across the globe (Exhibit 3). Analysts polled by Refinitiv have been bearish on these groups and have been revising their estimates down for these consumer-related sectors across the globe. The StarMine ARM model is highly predictive of both the direction of future revisions and price movement. The Consumer Services group scores 18 out of a possible 100, suggesting that analysts are likely to revise earnings estimates downward.

Exhibit 3: StarMine Analyst Revisions Model Scores

Source: StarMine

Still, in addition to higher commodity prices, the consumer has also been facing increasing gasoline prices. In the retail space, there are several discounters that sell gasoline – and motorists are attracted by the competitive prices.

In a time when consumer discretionary spending is expected to decline, analysts polled by Refinitiv are bullish on discounters — and not just because consumers are trading down on spending.

Since the end of January, analysts polled by Refinitiv have been revising their estimates upwards for these discounters for Q1 2022.

Sam’s Club’s Same Store Sales estimate (SSS), including fuel, went up from 4.8% in January to 6.0% in March (Exhibit 4). The same can be said for Costco Wholesale, and BJ’s Wholesale SSS including fuel.

Notice how for the most part, the other discounters that don’t sell fuel have weaker SSS estimates for Q1 2022.

Exhibit 4: Discounters’ Same Store Sales Estimates Revisions: Q1 2022


I/B/E/S data from Refinitiv

Q4 2021 earnings

Here are this and next week’s Q4 2021 earnings and same store sales expectations:

Exhibit 5: Same Store Sales and Earnings Estimates–Q4 2021

Source: Refinitiv I/B/E/S estimates

 

 

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