November 11, 2022

Q3 2022 U.S. Retail Preview: A Bumpy Road for Most Sectors

by Jharonne Martis.

The Refinitiv U.S. Retail and Restaurant Q3 earnings index, which tracks changes in the growth rate of earnings within the sector, is expected to show a weak 1.6% growth over last year’s levels. Our metrics show that eight of 11 consumer-related industries have turned negative (Exhibit 1). Of the 204 retailers tracked by Refinitiv, the Hotels, Restaurant & Leisure sector is headed for the highest earnings growth rate in the third quarter, recording a 97.1% surge over last year’s level.

In fact, it has been the strongest performing sector this year. These firms have been benefiting from the fact that consumers feel more comfortable traveling, staying at hotels and eating out.

The second-strongest sector, Household Durables, has a Q3 earnings growth rate estimate of 20.4% (Exhibit 1). At the other end of the spectrum, Internet & Catalog Retail is facing difficult comparisons and has the weakest anticipated Q3 2022 estimate, with profits expected to decline by 37.0%.

Exhibit 1: The Refinitiv Retail Earnings Growth Rate – Q3 2022

Source: Refinitiv I/B/E/S

Within the Hotels, Restaurant & Leisure sector, Caesars Entertainment and Royal Caribbean Cruises recorded the strongest earnings growth rates of 122%, and 105%, respectively. Of the 44 companies in this group, 24 are on track to post positive estimated earnings growth for Q3.

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 six companies struggle to match pandemic-level earnings growth levels. During the pandemic, consumers gravitated to online retailers such as Amazon. The Internet behemoth reported an 8.5% decline in earnings growth in the first quarter of the year; Etsy, meanwhile, has recorded the strongest earnings decline of 1,329%.

So far, 121 companies or 59% of those in our Retail/Restaurant Index, have reported earnings for Q3 2022. Of this group, 68% announced earnings that exceeded analysts’ expectations, while 2% matched those forecasts and the remaining 30% reported earnings that fell below analysts’ predictions (Exhibit 2). The blended earnings growth estimate for Q3 2022 is 1.6%.

To date, 121 companies in the Retail/Restaurant index have reported revenue for Q3 2022. For this group, the Q3 2022 blended revenue growth estimate is 8.5%; 63% have reported revenue above analyst expectations, and 37% reported revenue below analyst expectations.

Exhibit 2: Refinitiv Proprietary Research Restaurant & Retail Dashboard – Q3 2022

Guidance

Source: Refinitiv I/B/E/S

So far, 121 retailers have reported Q3 earnings; of this group, 97 mentioned inflation and 99 flagged supply chain issues.

In addition to the 29 negative preannouncements and nine positive EPS forecasts in Q3 2022, 39 retailers posted negative revenue outlooks while 22 offered a positive outlook for revenue (Exhibit 3). The bulk of the Q3 2022 negative guidance (44.8%) comes from the apparel and specialty retail sectors.

Looking ahead to Q4 2022, 10 retailers issued negative preannouncements, while three issued positive EPS guidance so far. Of those retailers offering revenue guidance, 15 warned of disappointing results, while five said revenue might be better than previously expected.

Exhibit 3: Earnings and Revenue Guidance: Q3 2022 and Q4 2022 Retail Sales

Source: Refinitiv I/B/E/S

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 2.8% gain in Q3 2022 (Exhibit 4). An increase of 3.0% in SSS signals that consumer spending is healthy. So, the forecast rises of 2.8% for SSS is relatively healthy, especially when considering the difficult comparison the index faces. Last year at this time, Q3 2021 SSS came in at a whopping 10.0%: the third- 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 4: Refinitiv Same Store Sales Index: 2017 – Present

Source: Refinitiv I/B/E/S

Even as higher food prices eat into spending power, consumers also have had to grapple with rising 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 13.4% SSS estimate for Q3 2022, delivering instead a SSS gain of 13.7%. This is even more remarkable considering the difficult SSS comparison 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, but also because they offer shoppers discounted prices at the gasoline pump.

In spite of the difficult comparisons, discounters are demonstrating their ability to maintain business volume. Target is on track to report 2.2% SSS, on top of a robust 12.7% SSS growth last year. In normal times, a 2.2% SSS would signal only modest business growth, but in the case of Target’s very difficult SSS comparison over year-ago levels, it’s a sign that the retailer’s business is holding up well.

Some retailers that witnessed strong SSS a year ago remain on track to better their performance for Q3 2022. Lovesac is facing the most difficult SSS comparison from last year of 47.1% and is still on track to report double-digit comp at 11.2% (Exhibit 5).

Some of the pandemic’s outperformers continue to deliver strong gains in SSS. Despite facing difficult SSS comparisons, this group is posting robust SSS growth estimates for Q3 2022.

A few standouts within this select company are Lululemon, Aritzia and Hibbett Sporting Goods. The latter, a sporting goods retailer, reported a robust 13.0% SSS gain in Q3 2021 as customers gravitated to sports and wellness during the pandemic. This year, it is on track to follow that by reporting a 12.5% SSS increase in Q3 2022 as consumers cling to that preference.

Consumers also remain willing to spend to improve their stay-at-home experience. Lovesac is facing a difficult comparison of 47.1% — and still expected to post double digit Q3 SSS gains with an 11.2% Q3 SSS estimate. Other firms following this pattern include Land’s End, Chico’s and Ralph Lauren, with very difficult comparisons, but nevertheless all are on track to post double-digit comps for the third quarter of 2022 of 20.0%, 13.1 % and 9.8% SSS, respectively.

Exhibit 5: Strongest Same Store Sales Estimates: Q3 2022 Estimate vs. Q3 2021 Actual

Source: Refinitiv I/B/E/S

Mall stores, including apparel retailers and department stores, had been struggling with weak traffic even before the coronavirus pandemic forced most to shut their doors in the spring of 2020; now, they remain the most vulnerable to seeing underwhelming SSS growth. (Exhibit 6). Accordingly, Bed Bath & Beyond is expected to post the weakest Q3 SSS at -25.4%, followed by Zumiez at -23.8%.

Exhibit 6: Weakest Same Store Sales Estimates: Q3 2022 Estimate vs. Q3 2021 Actual

Restaurant Same Store Sales

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

The Refinitiv Restaurant Same Store Sales (SSS) index nosedived into negative territory in 2020, hitting a record low in Q3 2020. Since then, the picture has improved and the index is expected to see a healthy 4.1% growth in SSS in Q3 2022, in spite of the difficult comparison offered by an 14.8% gain in SSS last year. (Exhibit 7).

It’s important to note that, once again, the 2020-2021 results don’t offer an apples-to-apples comparison over previous years, given that quarantine rules and other pandemic restrictions forced many restaurants to close. As a result, a number of restaurants didn’t report SSS data during the pandemic.

Exhibit 7: Refinitiv Restaurant Same Store Sales Index: 2019 – Present

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

The Restaurant SSS data is in line with the restaurant earnings data suggesting that despite difficult comparisons from last year, they are still on track for healthy profits. This is due to consumers feeling more comfortable with the reopening and eating out.

As a result, over 90% of the restaurants in our SSS index are on track, or have, posted positive Q3 2022 SSS. Still, despite taking the biggest beating of all the restaurants in this group last year, Yum China recorded a flat SSS above its -3.4% Q3 SSS estimate (Exhibit 8). Meanwhile, McDonald’s and Burger King beat their comp estimates with gains in SSS of 9.5% and 10.3%, respectively.

Exhibit 8: Restaurants facing easy SSS comparisons: Q3 2021 Actuals vs. Q3 2022 Estimates

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

Within this category, Ruth’s Hospitality faced the most difficult comparison. Last year, it recorded a SSS gain of 66.8% for the third quarter; this year, it still has a healthy SSS growth estimate of 4.0%. Similarly, a few standouts in this category include Pot Belly, BJ’s Roadhouse, Texas Roadhouse and Shake Shack that despite facing difficult SSS from a year-ago, managed to beat their SSS estimates and post robust comps of 15.0%, 8.9%, 8.2%, and 6.3%, respectively.

Exhibit 9: Restaurants Facing Difficult Same Store Sales Estimates/Actuals: Q3 2022

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

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