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November 13, 2023

Q3 2023 U.S. Retail Preview: Consumers feel more confident about spending

by Jharonne Martis.

The LSEG U.S. Retail and Restaurant Q3 earnings index, which tracks changes in the earnings growth rate within the sector, is expected to show a 26.4% growth over last year’s levels. Our metrics show that five of 10 consumer-related industries have turned negative (Exhibit 1).

Of the 204 retailers tracked by LSEG, the Broadline Retail sector is headed for the highest earnings growth rate in the third quarter, recording a 279.1% surge over last year’s level. The second strongest sector is the Hotels, Restaurants & Leisure group with a 92.9% growth estimate. In fact, it has been the strongest-performing sector over the past two years as consumers’ preferences have pivoted towards services. People are making up for lost time during the pandemic —  traveling, staying at hotels and eating out.

At the other end of the spectrum, Personal Care Products is facing difficult comparisons and has the weakest anticipated Q3 2023 estimate, with profits expected to decline by 49.4% (Exhibit 1).

Exhibit 1: The LSEG Retail Earnings Growth Rate – Q3 2023

Source: LSEG I/B/E/S

Within the Broadline Retail sector, Amazon and Etsy already recorded the strongest earnings growth rates of 235.7%, and 108.4%, respectively. Analysts polled by LSEG remain bullish on these two companies’ earnings estimates for the holiday season. Still, of the seven companies in this group, three are on track to post negative estimated earnings growth for Q3.

The second strongest sector is the Hotels, Restaurant & Leisure sector. Of the 47 companies in this group, 33 are on track to post positive estimated earnings growth for Q3. Wingstop and Domino’s Pizza already recorded the strongest earnings growth rates of 53.3%, and 49.8%, respectively. Analysts polled by LSEG remain bullish on these two companies’ earnings estimates for the current quarter.

In contrast, the Personal Care Products 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 five of the ten companies struggle to match year-ago earnings growth levels. Estee Lauder already reported a 92% decline in earnings growth in the third quarter of 2023, followed by Medifast, which has recorded an earnings decline of 51.5%.

So far, 141 companies or 69% of those in our Retail/Restaurant Index, have reported earnings for Q3 2023. Of this group, 70% announced earnings that exceeded analysts’ expectations, while 4% matched those forecasts and the remaining 26% reported earnings that fell below analysts’ predictions (Exhibit 2). The blended earnings growth estimate for Q3 2023 is 26.4%.

To date, 141 companies in the Retail/Restaurant index have reported revenue for Q3 2023. For this group, the Q3 2023 blended revenue growth estimate is 4.2%; 58% have reported revenue above analyst expectations, and 42% reported revenue below analyst expectations.

Exhibit 2: LSEG Proprietary Research Restaurant & Retail Dashboard – Q3 2023

Source: LSEG I/B/E/S

Holiday anticipation: inventory levels

As retailers enter the much-anticipated holiday season, inventory levels are crucial for the fourth quarter. Some are better poised for success in terms of inventory levels. When comparing several retailers’ inventory turnover to their industry average, the results show that Nike, Kroger and Costco are ahead of the game. Costco is best positioned with a positive gap difference of 1.4 compared to its industry mean. Still, 66.66% out of the 30 companies in our sample, had lower inventory turnover ratio than their industry mean. In this group, Dollar General has the biggest negative gap of 1.9 compared to its industry mean, suggesting inventory levels might not be as lean (Exhibit 3).

Exhibit 3: Retailer’s Inventory Turnover Difference compared to Their Industry Mean

Source: LSEG 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 years in history that are at all comparable to those that retailers endured in 2020 through 2022. 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 LSEG Same Store Sales (SSS) index is expected to see a healthy 2.1% gain in Q3 2023 (Exhibit 4). An increase of 3.0% in SSS signals that consumer spending is healthy. It is certainly at this time considered a modest SSS when considering the difficult comparison the index faces. Last year at this time, Q3 2022 SSS came in at a robust 6.4% growth.

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: LSEG Same Store Sales Index: 2017 – Present

Source: LSEG I/B/E/S

Consumer confidence has remained steady for the past quarter. Accordingly, consumers are showing signs of feeling better about stretching their budgets. Abercrombie is on track to post its second quarter of robust SSS. The teen retailer has a 11.3% SSS estimate for Q3. Its double-digit comp is a sign that parents aren’t frowning as much when they allow their kids to spend $100 for a “must have” pair of distressed denim jeans. It looks like the U.S. consumer remains resilient.

Lululemon was a favorite during the pandemic and is expected to post another robust SSS growth with a 12.4% SSS estimates for Q3 2023. A few other standouts this quarter include Urban Outfitters and TJX. The latter is receiving a boost from the upper middle-class consumer, who wants designer clothing for less. Meanwhile, Urban Outfitters is receiving a boost from its Free People division, which is on track to report an impressive 20.7% comp. This is impressive considering that these retailers are facing difficult comparisons from a year ago. (Exhibit 5).

Consumers continue to feel the pressure of higher food prices on their spending power and continue to gravitate towards the discounters for everyday low prices. As a result, discounters continue to demonstrate their ability to maintain business volume despite the difficult comparisons. The Dollar Tree store is also receiving a boost from a resilient bargain-hunting consumer and are expected to report a 5.2% SSS. Meanwhile, Walmart is on track to report a gain of 3.2%.

Exhibit 5: Strongest Same Store Sales Estimates: Q3 2023 Estimate vs. Q3 2022 Actual

Source: LSEG I/B/E/S

The home goods group received a boost during the pandemic. Accordingly, sales have slowed down since. As a result, the Container Store, Haverty’s Furniture, Williams Sonoma and Restoration Hardware are all in the bottom ten SSS performers for Q3 (Exhibit 6). Similarly, sporting goods were also big winners during the pandemic. But now, Big Five Sporting Goods is on track to post an -8.2% SSS for Q3.

Exhibit 6: Weakest Same Store Sales Estimates: Q3 2023 Estimate vs. Q3 2022 Actual

Source: LSEG I/B/E/S

Restaurant same store sales

The LSEG Restaurant Same Store Sales (SSS) index continues on a strong track and the index is expected to see a robust 4.9% growth in SSS in Q3 2023, despite facing last year’s difficult comparison of 6.1% gain. (Exhibit 7). 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 post-pandemic reopening and eating out more.

Within this industry, the Quick Service sector is on top with a 5.7% SSS estimate, stronger than the Casual Service sector. The Casual Service sector is on track to see a 2.3% SSS growth.

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: LSEG Restaurant Same Store Sales Index: 2019 – Present

Source: LSEG I/B/E/S

Easy comparisons

About 88% of restaurants in our SSS index are on track, or have posted positive Q3 2023 SSS. Papa John’s took the biggest beating of all the restaurants in this group last year and has already recorded an 2.2% SSS above its 1.6% Q3 SSS estimate (Exhibit 8). On the flip side, Yum China and Denny’s slightly missed their comp estimates with gains in SSS of 4.0% and 1.8%, respectively.

Exhibit 8: Restaurants Facing Easy SSS Comparisons: Q3 2022 Actuals vs. Q3 2023 Estimates

Source: LSEG I/B/E/S.

Difficult comparisons

Within this category, Potbelly faced the most difficult comparison. Despite this, it still posted a robust 8.0% comp, slightly below its 9.0% Q3 2023 SSS estimate. (Exhibit 9).

Similarly, a few standouts in this category include McDonald’s, Burger King and Texas Road House. Despite facing difficult SSS from a year-ago, they still posted strong Q3 2023 SSS of 7.2%, 8.8%, and 8.2%, respectively.

Exhibit 9: Restaurants Facing Difficult Same Store Sales Estimates/Actuals: Q3 2023

Source: LSEG I/B/E/S

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