The flowers may be blooming now, but the cold, snowy winter continues to cast a long shadow over the retail landscape. For the first quarter ended April 30, retailers are warning investors not to expect much from the bottom line. The Thomson Reuters Same Store Sales Index is expected to show an increase in Q1 of just 1.0%, below the 3.0% considered healthy.
Snow and brutal temperatures kept many shoppers home early this year. Excluding Walmart, the forecast SSS growth rate increases to 1.5%. Looking back a year, the TR SSS index actual for Q1 2013 was down 0.2% and excluding Walmart, it was up just 0.3%.
Returning to Q1 2014, the Thomson Reuters U.S. retail universe shows there have been 75 negative earnings per share pre-announcements issued by retailers, compared to only eight positive EPS pre-announcements. By dividing 75 by 8, one arrives at a negative/positive ratio of 9.4 for the universe.
Of the 76 companies in the SSS index, 28 have reported first quarter results. Of these, 39% exceeded their SSS estimates, while 61% missed them. As a result of the negative guidance, analysts have become bearish on retailers, and have been lowering both earnings and same store sales expectations since the beginning of the quarter.
The first quarter also underlined the continuing importance of the Internet as shoppers were stuck at home. As a result, investors and analysts are paying more attention to retailers mentioning during earnings calls any investment in e-commerce, technology and social media.
The chart below shows that at the beginning of the quarter, the Same Store Sales growth estimate declined to the current 1.0% from 2.1% at the start of the year.
EXHIBIT 1. THOMSON REUTERS SSS Q1 2014 ESTIMATES – AS OF FEB 2014 AND MAY 2014
Source: Thomson Reuters I/B/E/S
Easter arrives
U.S, retail sales came in weaker than expected in April, causing many to worry about the state of the consumer. However, digging deep into the data, it’s important to note that since Easter arrived late in April, March and April sales should be evaluated together in order to compare the spring season. Doing so would suggest U.S retail sales were healthy, which is in line with our Thomson Reuters SSS data suggesting retailers saw decent gains for the Easter season.
What’s more, beautiful weather arrived in April, driving shoppers to release some pent-up demand. As a result, several retailers mentioned improved mall traffic in April, and both Cato and L Brands raised their first quarter earnings expectations.
Similarly, Macy’s sounded upbeat in their Q1 earnings release. The retailer missed comp estimates as bad weather hurt business trends, but managed to beat on gross margins. This is key, in a time when most retailers have been offering steep promotions to move inventory, which if not done right can hurt the bottom line. Macy’s said that business trends recovered as weather improved: “a good sign moving forward into the second quarter” (Source: Macy’s press release, 5/14/2014). Q2 SSS estimates for Macy’s show an improvement as well (Exhibit 2). Finally, shoppers recently received their tax refunds. All this bodes well entering the second quarter.
EXHIBIT 2. MACY’S SSS Q1 2013 – Q1 2014
Source: Thomson Reuters I/B/E/S
To promote or not to promote
JC Penney has reported first quarter results. As expected, the retailer beat on both earnings and same store sales. JC Penney faced the easiest first quarter Same Store Sales comparison from a year-ago (-16.6% in Q1 2013). The same can be said about earnings, which is why the retailer saw double-digit earnings growth. This is their second quarter of growth after nine quarters of earnings declines. The company is trying to regain its core promotion-loving customer. However, JC Penney is struggling to offer the right amount of discounts, without compromising margins. This is a strategy that Macy’s has been able to master in difficult retail times.
Similarly, Walmart missed earnings, revenue and Same Store Sales estimates. The retailer has now posted its fifth consecutive quarter of weak comps. Its core low- to mid-income consumer is being hit with higher payroll taxes, healthcare expenses, unemployment and loss of food stamps. As a result, they are trading down to the dollar stores. The middle-class consumer used to go to Walmart for their consumer staples. However, Walmart is now facing increased e-commerce competition, and is losing market share to the likes of Amazon.com. Still, Walmart acknowledged the importance of investing in e-commerce initiatives, and saw a spike of 27% in sales worldwide.
EXHIBIT 3. WALMART SSS Q1 2013 – Q1 2014
Source: Thomson Reuters I/B/E/S
Top performers
Women’s clothing retailer Free People has the strongest SSS estimate in our retail universe at 13.6%. The retailer faced the most difficult SSS comparison from a year-ago at 44%, and is still expected to post double-digit sales growth. Free People not only benefits from brand loyalty, but their shoppers are willing and able to pay full price. The retailer is aware of this, and offers very little discounting, which helps margins. This is key right now, because others retailers are struggling and must offer some sort of discount to lure shoppers into their stores. It’s owned by Urban Outfitters, Inc. which is expected to post a 0.1% SSS, below last year’s 9.0% result. Its Urban Outfitters division is bringing the overall sales growth down with its -9.9% SSS estimate.
The Home Improvement sector has the highest SSS estimate at 4.6%, followed by Jewelry at 4.1% SSS. Within this sector, Lowe’s Companies Inc. has the highest estimate at 5.0%, followed by Home Depot 4.4%.
Tiffany & Company’s Asia Pacific division is helping the company post a healthy 3.2% SSS for Q1 2014, below its 8.0% result from a year-ago.
Department stores see flat outlook
The Department Store sector is expected to post a flat SSS estimate vs. last year’s -0.3% SSS. Sears is bringing the sector down, with the lowest SSS estimate at -1.0%. Moreover, the retailer has an EPS estimate of $-1.77, weaker than last year’s $-1.54 result.
The StarMine Combined Credit Risk model gives Sears a score of 1 out of 100, the lowest possible score. The Combined Credit Risk model combines scores from the Structural Credit Risk, SmartRatio Credit Risk, and Text Mining Credit Risk models to give a broader view of the company’s creditworthiness than these models do individually. The model score of 1 implies a credit rating of CC, which is considered below investment grade.
Discounters also seem weak
The Discount sector is expected to register a 0.5% SSS, above last year’s flat SSS. However, excluding WMT, the discounters are expected to see 1.5% SSS growth, below the 2.5% estimate.
Target is expected to post a -1.0% for Q1 2014, below last year’s -0.6% SSS result. A widespread data breach hurt Target’s first quarter retail sales. Earnings are expected to take a beating too, with the consensus looking for a 12% decline.
EXHIBIT 4. TARGET SSS Q1 2013 – Q1 2014
Source: Thomson Reuters I/B/E/S
Dollar stores win on pennies
Dollar General Corp. is expected to post the strongest result in the Discount group at 2.4% SSS, followed by Dollar Tree Stores, Inc. at 2.0%, underlying the fact that the low-end consumer continues to trade down.
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