by Jharonne Martis.
With a total of 203 companies in our Retail/Restaurant Index now having reported their EPS results for Q1 2022, approximately two-thirds, or 69%, announced profits that beat analysts’ expectations. Another 3% of these companies delivered on-target results, while 28% reported earnings that fell below estimates. The Q1 2022 earnings growth rate came in at -16.6%.
The revenue growth for the 203 companies in this index came in at 11.1% for Q1 2022. Of those companies, 72% announced revenue that exceeded analysts’ expectations and the remaining 28% reported that their revenue fell below analysts’ forecasts.
Source: I/B/E/S data from Refinitiv
Looking Forward: Q2 2022 earnings
For Q2 2022, the Refinitiv Retail/Restaurant Index is looking at a -7.6% blended estimated earnings growth rate, and an 8.4% blended estimated revenue growth rate. Of the 203 retailers tracked by Refinitiv, the Hotels, Restaurant & Leisure sector is recording the highest estimated earnings growth rate in the second quarter, recording a 142.9% surge over last year’s level. Consumers booked their vacation travel months ago and plan to go through with their trips this summer despite inflation and higher fuel prices.
This is also in line with several credit card reports which show a rise in spending on travel and entertainment services, which is experiencing pent-up demand, influenced by the two-year COVID hiatus in travel.
Exhibit 2: The Refinitiv Retail Earnings Growth Rate – Q2 2022
Source: Refinitiv Workspace
Guidance: Q2 2022 earnings
Retailers recently finished reporting their earnings for Q1 2022. Of those 203 retailers that reported Q1 earnings; 195 mentioned inflation and all of them flagged supply chain issues.
Looking ahead to Q2 2022, 23 retailers issued negative preannouncements, while 12 issued positive EPS guidance. Forty retailers warned of disappointing revenue outlooks while 35 offered a positive outlook for revenue (Exhibit 3). The bulk of the Q2 2022 negative guidance (33.3%) has come from the specialty and apparel retail sectors.
Exhibit 3: Earnings and Revenue Guidance: Q2 2022
Low-end consumer feeling the pinch
Currently, low-income consumers are being squeezed the most in the absence of stimulus checks that last year boosted their cash flow. On top of that, they are facing higher inflation that is diminishing their spending power. Weaker-than-expected earnings results from discount retailers, which target mostly these lower-income consumers, reflect this new reality.
During Dollar General’s earnings call, we also learned that higher fuel prices are causing the consumer to shop closer to home. Moreover, this trend is attracting the next tier up — lower-middle class consumers who are trading down: “Lastly I’ll mention is the gas prices. What would normally also occur and we’re starting to see is she starts to shop closer to home, not only our core consumer, but that next cohort up, so that trade in that you mentioned, because let’s admit it, right, the gas price is at $4.40, $4.50 a gallon now, on average, is keeping her closer to home. So those shopping patterns are definitely changing, and we’re seeing it happen right before our eyes” (Source: DG Q1 2022 Earnings Call, Search & Discover App in Workspace).
Middle-class consumer looking for value
Within the retail space, several discounters sell gasoline and motorists are responding favorably to the competitive prices offered by this group. A 3.0% Same Store Sales (SSS) gain reflects healthy consumer spending. And Costco, Sam’s Club and BJ’s Wholesale are all on track to report Q2 2022 SSS above the healthy mark (Exhibit 5).
Moreover, for Q2 2022, Home Depot is on track to post a 5.0% SSS stronger than the previous quarter. This retailer continues to see a boost from consumers investing in their homes.
Meanwhile, Ulta Beauty is also on track to see a robust 8.4% SSS as consumers want to look good returning to work, going to events, and traveling this summer.
High-end retailers are passing on higher prices to the consumer
Meanwhile, the luxury retailers keep passing on higher prices to the high-end consumer who is paying full price for the latest merchandise.
Earlier this year, Lululemon announced price increases, but said during its latest earnings call that these moves are not having a negative impact on sales: “As I’ve shared previously, we are implementing some select price increases and have not seen any negative impact to our sales volume as a result. However, unlike many in the industry, we do not use promotional pricing as a lever to drive top line sales” (Source: LULU Q1 2022 Earnings Call via Search & Discover App in Workspace).
Lululemon is on track to post a robust 16.8% SSS for Q2 2022. To predict future changes in analyst sentiment, we turned to the StarMine Analyst Revisions model (ARM). The model is highly predictive of both the direction of future revisions and price movement. The analyst revisions score for Lululemon is 94 out of a possible 100, suggesting that analysts polled by Refinitiv are bullish on the retailer and are likely to revise earnings estimates upward.
Source: Refinitiv Workspace
Tourists’ spending is also boosting retail sales. Macy’s said during their earnings call that tourism is picking up in the U.S. Tourists are shopping again in New York and San Francisco: “During the quarter, we also benefited from international tourist traffic, particularly from Central and South America as well as Europe, aiding stores like our flagships at Herald Square in New York and Union Square in San Francisco, along with many of our downtown locations” (Source: M Q1 2022 Earnings Call via Search & Discover App in Workspace).
Finally, notice in the table below that the current 2022 estimates for the largest luxury brands are projected to be stronger than pre-pandemic levels, and stronger than the previous three years, suggesting that the affluent shopper is fully engaged.
Exhibit 7: Luxury Retailers’ Revenue and Net Income 2019 – 2022
Source: Refinitiv I/B/E/S
So what’s keeping the consumer engaged?
The Refinitiv/Ipsos Consumer Confidence Index has been on the decline this year in the wake of continued inflationary pressure, rising interest rates, and global uncertainty. The Refinitiv Consumer Confidence Index consists of four sub-indices.
However, its Jobs Index (69.1), was up 1.6 points last month, and is the only sub‐index within the consumer confidence report that consistently keeps posting a gain this year. This means that despite low consumer confidence, the low unemployment rate is making consumers feel secure in their employment and therefore encouraged to spend freely.
Exhibit 8: U.S. Unemployment Rate 1990 – 2022
As a result, the Refinitiv Same Store Index is expected to decline slightly by 3.4% in Q2 2022 from a 4.3% gain in Q1 2022, but still remain above the 3.0% SSS healthy mark.
Exhibit 9: The Refinitiv Same Store Sales Index 2019 – 2022
Source: Refinitiv I/B/E/S