Retail Earnings: An In-Depth Analysis

Zacks

27 Feb

Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>

Here are the key points:

With more than 90% of the earnings reports already in, we can safely say that it has been a good reporting cycle, with the growth pace showing a notable accelerating trend and companies comfortably beating consensus estimates.

Total earnings for the 456 S&P 500 companies that have reported results are up +13.6% from the same period last year on +5.5% higher revenues, with 77.6% beating EPS estimates and 66.7% beating revenue estimates.

The reporting focus is shifting to the Retail sector, where the brick-and-mortar operators are on deck to report results in the days ahead. However, more than half of the Zacks Retail sector companies have already reported Q4 results.

For the Zacks Retail sector, we now have Q4 results from 95.3% of the sector’s market capitalization in the S&P 500 index. Total earnings for these companies are up +32.3% from the same period last year on +7.0% higher revenues, with 72.0% beating EPS estimates and 72.0% beating revenue estimates. Excluding Amazon’s results from the reported Retail sector numbers, the Q4 earnings and revenue growth rates adjust down to +4.6% and +5.4%, respectively.

Retail Earnings: Good or Bad?

The earnings focus lately has been on the Retail sector, with big-box operators coming out with quarterly results. Walmart shares were down following its release as market participants were disappointed with its guidance, particularly on the earnings front. Walmart’s results were rock solid, with continued comp gains on the back of market share gains and e-commerce momentum.

Walmart’s guidance is likely nothing more than conservatism on the part of management, as there has been nothing in the company’s line items that would suggest impending margin pressures. We credit the stock’s post-release weakness more to a sell-the-news type of reaction following Walmart shares’ recent outperformance. Even after its recent weakness, Walmart shares are up +62.1% over the past year compared to the S&P 500 index’s +18.3% gain and Amazon’s AMZN +23.3% gain.

Unlike Walmart, Home Depot HD shares were up following the earnings release despite weak guidance. What the market liked in the Home Depot release was the company’s better-than-expected comps, which turned positive for the first time after eight back-to-quarters of declines. We saw a similar development with Lowe’s LOW, with the company’s comps turning positive after eight quarters of declines.

The home-improvement retailers have been operating in a challenging macro environment, with elevated interest rates weighing on home sales and spending on remodeling projects. Housing bulls cite the strong labor market, record home equity levels, and favorable demographic trends as sufficient to produce a recovery, even if long-term interest rates continue to remain around current levels. The comp recovery for Home Depot and Lowe’s can be interpreted to validate this favorable view of the space, strengthening hopes of a sustainable recovery in the second half of the year.

The chart below shows the one-year performance of Walmart, Amazon, Home Depot, and Lowe’s relative to the S&P 500 index.