Retailers are experiencing a range of issues as the pandemic enters its third year: persistent supply chain disruptions and inflationary pressures on consumer spending across the price spectrum. Walmart, Target and Best Buy have issued profit warnings as shoppers economize and inventory piles up. Meanwhile, online giant Amazon said it’s experiencing strong consumer spending.
The Refinitiv/Ipsos Consumer Confidence Index has declined 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, for most of 2022, its Jobs Index was the only sub‐index within the consumer confidence report that consistently kept rising. This means that despite low consumer confidence, the strength in the U.S. employment market is the reason consumers remained engaged for most of 2022 despite higher inflation.
The low unemployment rate is making consumers feel secure in their employment and therefore encouraged to spend freely earlier this year (Exhibit 1) but the latest consumer sentiment report showed the first signs that consumers are starting to feel a bit worried about job security.
The latest Refinitiv/Ipsos Primary Consumer Sentiment Index declined for the second consecutive month, dropping below 50 for the first time since December 2020. The decline in sentiment is widespread. In fact, last month shows the largest single-month decline of 2022 across a variety of themes including Americans’ perception of their current financial standing, job security and investment prospects.
Exhibit 1: U.S. Unemployment Rate 1990 – 2022
Source: Refinitiv I/B/E/S
Guidance
Other retailers are delivering similar warnings as they report their earnings for Q2 2022. So far, 80 retailers have reported Q2 earnings; of this group, 59 mentioned inflation and 70 flagged supply chain issues.
In addition to the 25 negative preannouncements and thirteen positive EPS forecasts in Q2 2022, 44 retailers posted negative revenue outlooks while 37 offered a positive outlook for revenue (Exhibit 2). The bulk of the Q2 2022 negative guidance (40.0%) has come from the specialty and apparel retail sector.
Looking ahead to Q3 2022, eight retailers issued negative preannouncements, while two issued positive EPS guidance. Of those retailers offering revenue guidance, eight warned of disappointing results, while five said revenue might be better than previously expected.
Exhibit 2: Earnings and Revenue Guidance: Q2 2022-Q3 2022
Source: Refinitiv I/B/E/S
Q2 2022 earnings
The Refinitiv U.S. Retail and Restaurant Q2 earnings index, which tracks changes in the growth rate of earnings within the sector, is expected to decline by 13.8% over last year’s levels. Of the 204 retailers tracked by Refinitiv, the Hotels, Restaurant & Leisure sector is expected to record the highest earnings growth rate in the second quarter, recording a 186.6% surge over last year’s level.
The second strongest sector, the Household Durables, had a Q2 earnings growth rate of 35.1% (Exhibit 3). At the other end of the spectrum, Internet & Catalog Retail is facing difficult comparisons and has the weakest anticipated Q2 2022 estimate, with profits expected to decline by 115.4%.
Exhibit 3: The Refinitiv Retail Earnings Growth Rate – Q2 2022
Source: Refinitiv I/B/E/S
Within the Hotels, Restaurant & Leisure sector, Booking Holdings and Expedia Group recorded the strongest earnings growth rates of 848.2%, and 273.5%, respectively. Of the 44 companies in this group, 21 are on track to post positive earnings growth rates. These firms are benefiting from the fact that after two years stuck at home, consumers are ready to travel, stay at hotels and eat out.
In contrast, the Internet & Catalog Retail group is hampered by difficult year-over-year earnings comparisons. Negative growth expectations are directly responsible for the forecast decline in the overall earnings growth rate within the group, as four of the five companies struggle to match pandemic-level earnings growth levels. During the pandemic, consumers gravitated to online retailers such as Amazon. The Internet behemoth reported a 126.5% decline in earnings growth in the second quarter of the year; Etsy, meanwhile, reported an earnings decline of 25%.
So far, 121 companies or 59% of those in our Retail/Restaurant Index, have reported earnings for Q2 2022. Of this group, 73% announced earnings that exceeded analysts’ expectations, while 2% matched those forecasts and the remaining 25% reported earnings that fell below analysts’ predictions (Exhibit 4). The blended earnings growth estimate for Q2 2022 is -13.7%.
To date, 122 companies in the Retail/Restaurant index have reported revenue for Q2 2022. For this group, the Q2 2022 blended revenue growth estimate is 8.9%; 61% have reported revenue above analyst expectations, and 39% reported revenue below analyst expectations.
Exhibit 4: Refinitiv Proprietary Research Restaurant & Retail Dashboard – Q2 2022
Source: Refinitiv I/B/E/S
Retail sales
Same Store Sales (SSS) also are commonly referred to as Comparable Store Sales. However, it’s impossible to come up with any year in history that is at all comparable to those that retailers endured in 2020 and 2021. Never before had governments required retailers and other businesses to close their physical locations. As a result, several retailers didn’t report SSS and many companies ceased providing this guidance during most of the pandemic.
The Refinitiv Same Store Sales (SSS) index is expected to see a 3.6% gain in Q2 2022 (Exhibit 5). An increase of 3.0% in SSS signals that consumer spending is healthy. So, the forecast gain of 3.6% for SSS looks good, considering the difficult comparison the index faces. Last year at this time, Q2 2021 SSS came in at a whopping 11.0%: the second strongest SSS result recorded during the pandemic.
It’s very important to note that due to the pandemic, the 2022 results don’t offer an apples-to-apples comparison of current trends relative to previous years, as many retailers were closed due to shelter in place regulations.
Exhibit 5: Refinitiv Same Store Sales Index: 2017 – Present
Source: Refinitiv I/B/E/S
Even as higher food prices eat into spending power, consumers are also grappling with higher gasoline prices. Within the retail space, several discounters sell gasoline and motorists are responding favorably to the competitive prices offered by this group. Costco already has beaten its 11.4% SSS estimate for Q2 2022, delivering an SSS gain of 14.9%. Costco managed to post double-digit comps, despite the difficult comparison of 20.6% recorded last year.
At a time when economists are predicting that discretionary spending by consumers is likely to decline, analysts polled by Refinitiv remain bullish on discounters — and not just because consumers are trading down in search of lower prices. Since the beginning of May, analysts polled by Refinitiv have been boosting their estimates for these discounters for Q2 2022.
In May, analysts had predicted that SSS at Sam’s Club (including fuel) would rise 8.0% in Q2; by August, those analysts had revised their forecast upward to 11.4%. Analysts covering Costco Wholesale, and BJ’s Wholesale similarly adjusted SSS estimates (including fuel) upward. For the most part, discounters that don’t sell fuel have failed to keep pace; analysts are looking for weaker SSS results for Q2 2022.
Despite facing difficult SSS comparisons over year-ago levels, analysts still expect the following retailers to report the strongest Q2 2022 SSS results: Lovesac, Costco Wholesale, Ralph Lauren Corp., Ulta Salon and Williams Sonoma Inc. (Exhibit 6).
Consumers also remain willing to spend to improve their stay-at-home experience, reflected in the results of the Home category. This group includes two companies facing some of the most difficult year-over-year comparisons. Topping that list is Lovesac, facing a difficult comparison of 39.5% — and still is expected to post double digit Q2 SSS gains with a 16.8% estimate. Similarly, the estimate for SSS growth at Williams Sonoma is 6.1%; that comes on top of last year’s robust 29.8% SSS result.
These estimates suggests that consumers continue to invest in the stay-at-home experience, while wanting to look good for the reopening. Accordingly, Lululemon is also on track to post a robust 16.9% SSS comp, despite raising prices.
Exhibit 6: Retail Winners: Q2 2022 SSS Estimate vs. Q2 2021 Actual
Source: Refinitiv I/B/E/S
Meanwhile, consumers are prioritizing experiences over things. As a result, mall stores, including Citi Trends, Tilly’s, Zumiez, Kirkland’s and Vera Bradley have been hurting from weak mall store traffic and are all in the bottom performers (Exhibit 7). Bed Bath & Beyond has the weakest SSS estimate among the department stores at -20.2%. Vera Bradley has been one of the weakest performers for more than five years. For Q2 2022, the retailer also has a weak SSS estimate of -10.4%. Likewise, Big Lots is on track to post negative comps at -9.3%.
Exhibit 7: Retail Losers: Q2 2022 SSS Estimate vs. Q2 2021 Actual
Source: I/B/E/S data from Refinitiv
Restaurant Same Store Sales
The Refinitiv Restaurant Same Store Sales (SSS) index nosedived into negative territory in 2020, hitting a record low in Q2 2020. Since then, the picture has improved and the index peaked to its strongest gain ever of 49.3% in Q2 2021. In spite of facing the most difficult comparison, the index is on track to post a healthy 3.0% gain in SSS (Exhibit 8).
Exhibit 8: Refinitiv Restaurant Same Store Sales Index: 2019 – Present
Source: I/B/E/S data from Refinitiv
Consumer demand is so strong for restaurants that only four out of the 32 restaurants are expected to see negative SSS (Exhibit 9). YUM China Holdings Inc. has the weakest SSS actual of -16% SSS, above its estimate at -18.0%, followed by Domino’s Pizza -2.9% SSS result. Meanwhile, Wingstop posted its first negative SSS in years at -3.3%, below its -1.3% SSS estimate. The weakness in the restaurant index is coming from the quick service names.
Exhibit 9: Restaurant Losers: Q2 2022 SSS Estimate vs. Q2 2021 Actual
Source: I/B/E/S data from Refinitiv
Ruth’s Hospitality has the most difficult SSS comparison of 286.6% from last year, and now is on track to post double digit growth at 13.5% SSS for Q2 2022 (Exhibit 10). Pot Belly currently has the strongest Q2 2022 SSS estimate among the restaurants at 17.0%, despite its 70.0% SSS result posted last year. Likewise, Shake Shack, BJ’s Restaurant, and Chipotle have already posted double digit comps of 10.1% and higher. Other restaurants expected to post healthy SSS include El Pollo Loco and CBRL Group with comp estimates of 9.5% and 9.1%. Casual Dining companies continue to perform well as consumers want to eat out more.
Exhibit 10: Restaurant Winners: Q2 2022 SSS Estimate vs. Q2 2021 Actual
Source: I/B/E/S data from Refinitiv
