The following excerpt is from this week's Earnings Trends. To see the full report, please click here.
Retail Sector’s Cloudy Earnings Picture
With results from 460 S&P 500 members already out, the Q3 earnings season is effectively over. Results from the remaining 40 companies wouldn’t change the aggregate earnings picture by much, but they are nevertheless important since almost half of them belong to the Retail sector. Of interest is not so much how these retailers did in Q3, but how they see the outlook for the holiday season unfolding.
Macy’s (M - Analyst Report) results appeared fairly encouraging on that front, but Macy’s doesn’t speak for the entire sector. Wal-Mart (WMT - Analyst Report) clearly is such a bellwether, but its results and outlook don’t inspire much confidence about what to expect from the sector as whole in Q4. We will have to wait and see how the remaining retailers report, but Wal-Mart’s underwhelming results despite the recent sharp drop in gasoline prices don’t bode well for others like Target (TGT).
Fewer shopping days this holiday season is not only prompting retailers to open their doors even earlier on Thanksgiving Day this year, but is likely making it a more promotional affair as well. Retailers are beating top-line expectations at a very low rate in Q3 relative to the last few quarters and we should probably brace ourselves for negative bottom-line surprises in Q4.
For the Q3 earnings season as a whole, total earnings for the 460 S&P 500 companies that have reported results already, as of Thursday morning November 14th, are up +4.8% from the same period last year, with 65.2% beating earnings expectations with a median surprise of +2.5%. Total revenues for these companies are up +3.0%, with 42.2% beating revenue expectations with a median surprise of +0.1%.
The charts below show how the results from these 460 companies compare to what these same companies reported in Q2 and the average for the last 4 quarters. The earnings and revenue growth rates, which looked weaker in the earlier phase of the Q3 reporting cycle, improved materially.
The earnings and revenue growth rates for the 56.8% of Retail sector companies in the S&P 500 that have reported already are modestly better than what we have seen from those same companies in recent quarters. But the beat ratios, specifically on the revenue side, remain very weak, with the sector’s revenue beat ratio the second worst of all 16 Zacks sectors in the S&P 500.
The chart below shows the sector’s revenue surprises compare to what we have seen in recent quarters. Please note that the chart compares the revenue surprises for the 25 retailers in the S&P 500 (out of 44 total) that have reported Q3 results already with the performance of those same 25 companies in Q2 and the 4-quarter average.
The composite earnings growth rate for Q3, combining the results from the 460 that have come out with the 40 still to come, currently remains at +4.8% on +3.0% higher revenues. This will be the best earnings growth rate of 2013 thus far, though expectations are for even stronger growth in Q4.
Estimates for Q4 have started coming down, though judging by the Wal-Mart and Cisco (CSCO) guidance, they likely still have plenty of room to go down. The chart below shows the evolution of Q4 growth rate over the last few weeks.
The picture emerging from the chart above would hardly be the first time estimates would be coming down like this – we have been seeing this play out quarter after quarter for more than a year now. The market hasn’t cared much about this uninspiring earnings picture thus far, likely a reflection of the ever-supportive Fed. And with most market participants expecting the Fed to hold off on making any changes to its policy stance till at least through April 2014, they may see no reason to worry about negative estimate revisions for Q4.
Total earnings for the 460 S&P 500 companies that have reported results already are up +4.8%, with 65.2% beating earnings expectations. Revenues for these companies are up +3.0%, with a revenue ‘beat ratio’ of 42.2%.
Unlike Q2, the Finance sector has been less of a growth driver in Q3, with total earnings for the sector up +9.9%. Excluding Bank of America (BAC - Analyst Report), the sector’s Q3 earnings growth drops to +3.6%. The sector’s growth momentum has decelerated from the last few quarters, with industry leaders J.P. Morgan (JPM - Analyst Report) and Goldman Sachs (GS - Analyst Report) disappointing.
Technology spotlights the ex-Finance variance from Q2, with total earnings for the 94.0% of the sector’s total market capitalization that have reported up +5.7% on +3.5% higher revenues. The +5.7% earnings growth for the 60 Tech companies that have reported compare to -8.5% earnings decline in Q2 and the 4-quarter average of -1.2% for the same group of companies.
Total Q3 earnings for all S&P 500 companies, combing the 460 that have reported with the 40 still to come, are expected to be up +4.8%, which reflects +3.0% revenue growth and modest gains in margins. This compares to +3.7% earnings growth in Q2.
Guidance remains negative, prompting estimate cuts for Q4, though there likely still plenty of downside to current +7.1% growth expected in Q4. While there is not much growth, the overall level of total earnings is quite high, with total earnings in Q3 on track to reach a new all-time quarterly record at $261.3 billion, surpassing Q2’s record of $258.5 billion.
Total earnings for the S&P 500 are expected to be up +6.3% in 2013 and +11.1% in 2014.
To see the Full Earnings Trends PDF, please click here.