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Earnings Preview: What to Expect from the Retail Sector

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The Q3 earnings season has effectively come to an end for most of the major sectors, with the Retail sector as the only one that has a significant number of reports still awaited, particularly from the space’s legacy operators. We will start getting those earnings results this week, with a number of major players like Walmart (WMT - Free Report) , Target (TGT - Free Report) , and Home Depot (HD - Free Report) on the big box side and Macy’s (M - Free Report) and Kohl’s (KSS - Free Report) on the department store front.

The Retail space had been experiencing a secular transition over the last few years, with consumer dollars steadily shifting to the online medium and traditional malls suffering falling foot traffic. The pandemic accelerated these pre-existing trends, with the digital shift getting a boost. The nature of spending also changed as a result of social distancing and work-from-home mandates.

The traditional department stores with their apparel-centric merchandise and large physical store footprint were dealt a severe blow during the period. The fact that these operators were slow to shift online only added to their woes. It is no surprise that a number of these players have been pushed over the edge by the pandemic. Macy’s and Kohl’s reporting this week are both expected to have lost money in the quarter.

Walmart, Target, and Home Depot that are also reporting this week don’t belong on the ‘victims’ list; they have thrived during this downturn and will likely continue to do so in the coming days.

Walmart shares are up +26.5% this year, handily outperforming the +10.1% gain for the S&P 500 index and -57.5% decline for Macy’s shares. Walmart’s Q3 EPS is expected to be up +1.7% on +3.7% higher revenues. Target shares are up +27.2% this year, with the company expected to report +16.2% higher EPS for Q3 on +11.5% higher revenues.

We typically associate the traditional brick-and-mortar operators as the only ones belonging in the retail space, with the traditional industry/sector classification systems putting those companies either in the Consumer Discretionary sector or in the Consumer Staples sectors. In that system, online vendors get placed in the Technology sector. But we have a stand-alone Retail sector that not only includes the traditional players but also online vendors and restaurant operators.

For the Zacks Retail sector, one of the 16 Zacks sectors, we have already seen Q1 results from 20 of the 34 companies in the S&P 500 index. Most of these Retail sector results that have come out already are from online operators and restaurant players, with the traditional brick-and-mortar players starting to report this week.

Total earnings for these Retail sector companies that have reported already are up +15.1% from the same period last year on +12.1% higher revenues, with 90% beating EPS estimates and an equal proportion beating revenue estimates. The comparison charts below put these Retail sector results in a historical context.
















As you can see above, an above-average proportion of retailers have been able to beat estimates thus far. That’s a behavior we have seen across the board from all sectors, with a much higher proportion of companies beating EPS and revenue estimates this earnings season.

With respect to the sector’s Q3 earnings and revenue growth pace (+15.1% earnings growth on +12.1% revenue growth), the picture changes meaningfully once Amazon’s (AMZN - Free Report) results are removed from the sector’s aggregated reported numbers.

The online vendor accounts for roughly 42% of the sector’s total market capitalization in the S&P 500 index and accounts for 37.3% of the sector’s total earnings that have come out already. We know that Amazon’s Q3 earnings were up +196.7% on +37.4% higher revenues.

Excluding contribution from Amazon, the Zacks Retail sector’s Q3 earnings would actually be down -15.7% on +2.9% higher revenues.

The chart below shows the sector’s growth comparison on an ex-Amazon basis.



















For Q3 as a whole for the sector, combining the results that have come out with estimates for the still-to-come companies, total earnings are expected to be down +11.9% from the same period last year on +9.4% higher revenues. Excluding Amazon, the sector’s Q3 earnings would be down -4.9% on +5.1% higher revenues. 

Q3 Earnings Season Scorecard (as of Friday, November 13th)

We now have Q3 results from 463 S&P 500 members or 92.6% of the index’s total membership. Total earnings (or aggregate net income) for these 463 companies are down -9% from the same period last year on -2% lower revenues, with 84.4% beating EPS estimates and 75.8% beating revenue estimates.

The two sets of comparison charts below put the Q3 results from these 463 index members in a historical context, which should give us a sense how the Q3 earnings season is tracking at this stage relative to other recent periods.

The first set of comparison charts compare the earnings and revenue growth rates for these 463 index members.















The second set of charts compare the proportion of these 463 index members beating EPS and revenue estimates.















As you can see above that not only is the pace of declines decelerating, but also a much bigger proportion of companies are beating EPS and revenue estimates.

The reporting cycle slows down in a notable way going forward, with this week bringing in more than 200 companies to report Q3 results, including 12 S&P 500 members. The notable companies reporting results this week, besides the aforementioned retailers, include NVIDIA (NVDA - Free Report) , Tyson Foods (TSN - Free Report) , Workday (WDAY - Free Report) and others.

Looking at Q3 as a whole, combining the actual results that have come out with estimates for the still-to-come companies, total earnings for the index are expected to be down -8.6% on -1.2% lower revenues.

The key factor from the market’s standpoint is how estimates for 2020 Q4 evolve as we go through the remainder of the Q3 reporting cycle. The trend thus far is positive, as the chart below shows.















Please note that the revisions trend appears to have leveled off in recent days, with estimates effectively stalling out.

The chart below takes a big-picture view of the quarters, showing Q3 earnings (green bars) and revenue (Orange bars) growth in the context of what was actually achieved in the last few quarters and what is expected in the coming periods.


















The chart below presents the big-picture view on an annual basis. As you can see below, 2020 earnings and revenues are expected to be down -17.4% and -4.2%, respectively.














The above annual growth picture approximates to an index ‘EPS’ of $132.28 for 2020, down from $160.04 in 2019 and $161.14 in 2021.

For an in-depth look at the overall earnings picture and expectations for the coming quarters, please check out our weekly Earnings Trends report >>>> Handicapping the Improving Earnings Picture

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