Back to top

Can Retail Stocks Build on Their Recent Gains?

Read MoreHide Full Article

The earnings focus shifts to the Retail sector this week as traditional brick-and-mortar retailers come out with quarterly results. Stocks of most of these traditional operators have outperformed the broader market this year, with the very favorable domestic consumer spending backdrop helping offset the market’s longstanding worries about the space’s competitive positioning in the emerging retail landscape of declining mall foot traffic and growing digital sales.

Given continued favorable trends in the broader economy, it is reasonable to be optimistic about earnings results from these traditional operators and their stock prices. But what will be critical to these stocks’ performance in the coming days will be management’s outlook for the coming holiday’s period. On deck to report results this week are Macy’s (M - Free Report) , Nordstrom (JWN - Free Report) , Wal-Mart (WMT - Free Report) and a number of others. In total, we have more than 300 companies reporting results this week, including 12 S&P 500 members.

Macy’s, Nordstrom and other department store stocks have been strong performers this year, with Macy’s up +50.1% and Nordstrom up +38.1% in the year-to-date period, doing better than the S&P 500’s +4.9% gain. These stocks had lost ground in the two-month period from mid-August to mid-October, but they shook off the October blues ahead of the broader market, as you can see in the chart below that shows this group’s performance since October 1st.

 

The red line in the chart above shows the Zacks Department Store industry, which is up +8.3% thus far in Q4 and +42.3% since the start of the year. Amazon (AMZN - Free Report) , which reported Q3 results that the market found disappointing, is down -14.5% in Q4, but is otherwise up +46% this year. We count Amazon as part of the Zacks Retail sector that includes the traditional retailers, restaurants and online vendors like Amazon.

Given the way we define the Retail sector, this week’s results from Macy’s, Wal-Mart and others wouldn’t be the first results from this space as many of the restaurants and online vendors have already posted Q3 results. In fact, we already have Q3 results from 19 of the 38 Retail sector companies in the S&P 500 index or exactly 50% of the sector companies in the index.

Total earnings for these 19 Retail sector companies that have reported results already are up +37.5% from the same period last year on +10.7% higher revenues, with 89.5% beating EPS estimates and 63.2% beating revenue estimates.

The comparison charts below put the sector’s Q3 results in a historical context.

The Retail sector results thus far are from the online vendors and restaurant players, with ‘traditional’ operators starting to report only this week. The comparison charts above show that while growth (both earnings as well as revenues) is below the preceding quarter’s level, it compares favorably with historical periods. Positive revenue surprises have been hard to come by this earnings season across all sectors and that appears to be the case with Retail as well.

With respect to the sector’s growth, Amazon’s blockbuster numbers, particularly on the revenues front, has a big role in the very strong growth picture at this stage, even though the online retail giant’s results disappointed the market.

The comparison charts below try to look at the sector’s growth picture with and without the Amazon contribution.

As you can see in the right-hand chart above, Q3 earnings growth is still very strong, but the revenue growth rate is a lot lower on an ex-Amazon basis. 

Q3 Earnings Season Scorecard (as of Friday, November 9th)

We now have Q3 results from 452 S&P 500 members or 90.4% of the index’s total membership. Total earnings for these 452 companies are up +26.1% from the same period last year on +8.9% higher revenues, with 78.3% beating EPS estimates and 63.3% beating revenue estimates.

The proportion of these companies beating both EPS and revenue estimates is 52.9%.

The comparison charts below put results from these 452 index members in a historical context.

Here are the four takeaways from the comparison charts above

  • Q3 earnings growth for these 452 index members at +26.1% represents an improvement of what we had seen from the same group of companies in other recent periods.

 

  • Revenue growth for these 452 index members at +8.9% is tracking below what we had seen in the preceding period, but represents an improvement over other recent periods.

 

  • EPS beats at 78.2% is below what we had seen from the same group of 452 index members in the preceding period, but is in-line with historical periods.

 

  • Revenue beats at 63.3% is tracking below historical periods. The fact is the proportion of positive revenue surprises is the lowest since the fourth quarter of 2016, as the chart below shows.

For Q3 as a whole, combining the actual results with estimates for the still to come companies, total earnings are on track to be up +25% from the same period last year on +8.3% higher revenues. Earnings growth in Q3 has been steadily going up, now very close to the preceding quarter’s +25.3% pace, which was the highest quarterly growth pace more than 7 years.

The table below shows a summary blended picture for the quarter, contrasted with what was actually achieved in the preceding period.

 

As pointed out in this space in recent weeks, estimates for the current period (2018 Q4) have been steadily coming down. The chart below shows how earnings growth expectations for the period have evolved since the quarter got underway.

The chart below puts the evolving earnings picture in the context where they have been in the last few quarters and what is expected in the next few.

 

 

For more details about the overall earnings picture and the Q3 earnings season, please check our weekly Earnings Trends report.

Note: Sheraz Mian manages the Zacks equity research department. He is an acknowledged earnings expert whose commentaries and analyses appear on Zacks.com and in the print and electronic media. His weekly earnings related articles include Earnings Trends and Earnings Preview.

Today's Stocks from Zacks' Hottest Strategies

It's hard to believe, even for us at Zacks. But while the market gained +21.9% in 2017, our top stock-picking screens have returned +115.0%, +109.3%, +104.9%, +98.6%, and +67.1%.

And this outperformance has not just been a recent phenomenon. Over the years it has been remarkably consistent. From 2000 - 2017, the composite yearly average gain for these strategies has beaten the market more than 19X over. Maybe even more remarkable is the fact that we're willing to share their latest stocks with you without cost or obligation.

See Them Free>>




In-Depth Zacks Research for the Tickers Above


Normally $25 each - click below to receive one report FREE:


Walmart Inc. (WMT) - free report >>

Macy's, Inc. (M) - free report >>

Nordstrom, Inc. (JWN) - free report >>

Amazon.com, Inc. (AMZN) - free report >>

More from Zacks Earnings Preview

You May Like