August 20, 2022

Q2 2022 U.S. Retail Scorecard – Update August 19, 2022

by Jharonne Martis.

To date, 161 of the 204 companies in our Retail/Restaurant Index have reported their earnings results for Q2 2022, representing 79% of the index. Of those companies that have reported their quarterly results so far, 74% announced that profits beat analysts’ expectations, while 2% delivered on-target results and 24% reported earnings that fell below estimates. The Q2 2022 blended earnings growth estimate now stands at -6.3%.

The blended revenue growth estimate for the 204 companies in this index is 9.1% for Q2 2022. Of those companies that have reported their quarterly results so far, 60% announced revenue that exceeded analysts’ expectations and the remaining 40% reported that their revenue fell below analysts’ forecasts.

Exhibit 1: Refinitiv Earnings Dashboard

Trends in discount retailing

This week’s earnings showed a clear distinction among the discounters. At a time when economists are predicting that discretionary spending by consumers is likely to decline, analysts polled by Refinitiv remain bullish on discounters that sell gasoline — and not just because consumers are trading down in search of lower prices. Since the end of April, analysts polled by Refinitiv have been boosting their estimates for Q2 2022 for the discounters that sell gasoline.

Motorists are responding favorably to the competitive prices offered by these discounters and continue to get a membership at discount warehouses to save money at the pump. At this time last year, Walmart’s membership count reached an all-time high. This year, membership income grew by 25.6% on top of last year’s level. This suggests that consumers continue to gravitate to Walmart for everyday values, more so than Target.

Notice in the exhibit below how the discounters that sell gasoline outperform the other discounters.

Exhibit 2: Discounters Same Store Sales Estimates and Actuals – Q2 2022

Source: Refinitiv I/B/E/S

E-commerce is picking up again

The government also released July’s monthly retail sales which came in unchanged from June.  Ex-autos and gasoline sales, retail sales increased to 0.7%. The strength came from digital sales (+2.7%) and building materials (+1.5%) which was in line with this week’s earnings results. Notice how the retailers smashed their e-commerce SSS estimates this week (Exhibit 3).

Home Depot said during its earnings call that “sales leveraging our digital platforms increased 12% versus the second quarter last year. We also saw record downloads, traffic and sales via our mobile app. We continue to see improved conversion rates as ongoing enhancements within our digital properties are resonating with our customers” (Source: Home Depot Earnings Call, Q2 2022). Moreover, demand for DIY and pro projects are still strong at Home Depot and Lowe’s.

Exhibit 3: E-commerce Same Store Sales Estimates and Actuals – Q2 2022

Source: Refinitiv I/B/E/S

Inventory and Discount Levels

Still, retailers are dealing with high inventory levels in Q2 2022, and retailers like Target were more promotional to get rid of excess inventory.

Almost 40 percent of the online merchandise for U.S. retailers was on sale in Q2 2022 (Exhibit 4). Refinitiv discovered this in a collaboration with StyleSage, which analyzes retailers, brands, online trends and products across the globe. The current discount penetration (how much of the assortment is on sale) is still below the pre-pandemic levels, when the average discount rate was above 40%.

Meanwhile, the average percent discount in August is 35.2%; this has come down from the Q2 levels of 36.6% and is below the pre-pandemic levels. Whether this trend in the U.S. will spill over into other geographies and retailers remains to be seen.

Exhibit 4: US Online Retail: Discount Penetration and Average Discount –2019 – Q2 2022

Source: StyleSage Co.

High Inflation

Kohl’s, TJX and Ross Stores all saw weaker than usual customer traffic, and blamed the impact of high inflation on consumer spending. Given the underperformance of these names, higher markdowns affected the bottom line. This is in line with the Refinitiv retail earnings data, which suggests that retailers are holding back on discretionary spending such as clothing and shoes.

Instead, the Hotels, Restaurants & Leisure sector is expected to be the strongest segment this quarter and the remainder of 2022 (Exhibit 5). After being cooped up in their homes for two years, consumers are traveling, no matter the price of gasoline. Also, the restaurant SSS data shows that Casual Dining companies continue to outperform the Quick Service restaurants as consumers want to sit down and eat out more.

Exhibit 5: The Refinitiv Retail Earnings Growth Rate – Q2 2022

Source: Refinitiv I/B/E/S

Likely to Beat Earnings

Other individual retail names that are expected to do well this quarter include Ulta Beauty and Williams-Sonoma with SSS estimates of 9.6% and 6.1%, respectively. Ulta Beauty currently has an EPS estimate of $4.96. However, there’s a five-star rated analyst with a very accurate rating that published a Bold Estimate, which is different (in this case higher) than the consensus estimate. The same applies to Williams-Sonoma. This suggests that it’s very likely that both these retailers will beat earnings and post a positive surprise.

Moreover, the StarMine models suggest that analysts polled by Refinitiv are likely to revise earnings estimates upward for Ulta Beauty, and it has positive price momentum in its favor (Exhibit 6).

Ulta Beauty scores an 83 out of a possible score of 100, placing it in the top quartile. The model is highly predictive of both the direction of future revisions and price movement. The analyst revisions score is high for the retailer. It is evident that analysts have become more bullish on the stock. Similarly, Ulta is in the top quartile, for the Price Momentum model. And, in the top decile for the Earnings Quality Model.

StarMine uses I/B/E/S estimates, fundamentals and other Refinitiv content to provide robust alpha-generating predictive analytics and quant models. StarMine Analytics are best-of-breed proprietary algorithms that lead to more accurate estimates and can also provide robust stock selection factors that span analyst revisions, valuation, price momentum and earnings quality.

Exhibit 6: The StarMine Model Scores for Ulta Beauty

Source: Eikon Workspace.

The following chart displays estimates of earnings and same store sales expectations for retailers that are scheduled to release their Q2 2022 results this coming week.

Exhibit 7: Same Store Sales and Earnings Estimates–Q2 2022

Source: Eikon Workspace

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