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The Retail Sector's Strong Earnings Performance

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The common view about the Retail sector is a space that has been particularly hit hard by the Covid-19 pandemic. This view gets reconfirmed when we see that Macy’s (M - Free Report) Q3 revenues declined by -21.9% or Kohl’s (KSS - Free Report) dropped by -14%. But then we have others like Target (TGT - Free Report) that saw its quarterly revenue jump +31.3% and Home Depot (HD - Free Report) whose top line increased +23.2%.

Walmart (WMT - Free Report) , Lowes (LOW - Free Report) and a number of other operators are also in the latter category that doesn’t fit the aforementioned common view of a space in distress. Given this, it is reasonable to expect this week’s lineup of results from the likes of Nordstrom (JWN - Free Report) , Gap (GPS - Free Report) , Best Buy (BBY - Free Report) and others to give us additional evidence of both developments.

The Covid-19 pandemic and associated lockdowns did cause havoc in parts of the broader retail space, with restaurants and department stores particularly hard hit. But department stores were hardly in good shape in the pre-pandemic period, with many of these players struggling to come to grips with the secular shift to the online medium. The reality is that the pandemic only accelerated trends that were already in place.

The department store business model was already under stress before the pandemic and the added pressure of operating in such a tough environment will push some over the brink and others to make the needed adjustments to survive. Macy’s online sales increased +27% in Q3, with digital sales now accounting for 38% of the total. Macy’s and its peers have to continue investing in the digital offering while at the same time bringing its physical footprint to reflect the changed ground reality.

But there is more to the Retail sector than just department stores and many of those other parts of the space are very good under the circumstances. These include the big-box discounters like Walmart, Target and others and the home improvement operators like Home Depot, Lowes and others. All of these players have vibrant digital offerings that represent growing parts of their business. And then, of course, we have Amazon (AMZN - Free Report) and other pure-play digital players that have thrived in the pandemic.

Retail Sector Scorecard

For the Zacks Retail sector, one of the 16 Zacks sectors, we have already seen Q3 results from 27 of the 34 companies in the S&P 500 index. Total earnings for these Retail sector companies that have reported already are up +20.4% from the same period last year on +11.4% higher revenues, with 92.6% 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 (+20.4% earnings growth on +11.4% revenue growth), the picture changes meaningfully once Amazon’s 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 22.1% 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 up only +3.1% on +6.8% 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 +20.2% from the same period last year on +10.9% higher revenues. Excluding Amazon, the sector’s Q3 earnings would be up +4.1% on +6.9% higher revenues.  

All in all, it is hard to call the sector’s Q3 results as anything but positive and strong, the seemingly never-ending department store pain notwithstanding.

Q3 Earnings Season Scorecard (as of Friday, November 20th)

We now have Q3 results from 475 S&P 500 members or 95% of the index’s total membership. Total earnings (or aggregate net income) for these 475 companies are down -7.7% from the same period last year on -1.1% lower revenues, with 84.8% beating EPS estimates and 76.4% beating revenue estimates.

The two sets of comparison charts below put the Q3 results from these 475 index members in a historical context, which should give us a sense of 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 475 index members.










The second set of charts compare the proportion of these 475 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 70 companies to report Q3 results, including 12 S&P 500 members. The notable companies reporting results this week, besides the aforementioned retailers, include Deere & Company (DE - Free Report) , Autodesk (ADSK - Free Report) , Agilent A 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 -7.8% on -1% lower revenues.

The key factor from the market’s standpoint is how estimates for 2020 Q4 evolve as we see the last two dozen or so reports come out and look ahead to the early Q4 reporters. The trend thus far is positive, as the chart below shows.












Please note that the revisions trend appears to have levelled off in recent days, with estimates effectively stalling out over the last two weeks.

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% and -4.1%, respectively.










The above annual growth picture approximates to an index ‘EPS’ of $132.54 for 2020, down from $159.69 in 2019 and $161.29 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 >>>> Diving into Retail Sector Earnings    

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