Note: The following is an excerpt from this week’s report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, Earnings Trends please click here>>> Here are the key points:
Disappointing results from bellwether retailers have raised questions about the health of the consumer in the current inflationary environment. But the issue appears to be one of execution by the failing operators, rather than consumer spending, at least at this stage.
For the Zacks Retail sector, we now have results from 93.6% of the sector’s market cap in the S&P 500 index. Total Q1 earnings for these retailers are down -18.8% from the same period last year on+7.7% higher revenues, with 61.5% beating EPS estimates and 73.1% beating revenue estimates.
The 61.5% EPS beats percentage is the lowest since 53.8% in 2018 Q4 and the second lowest in the last 5 years. It is tempting to interpret the Walmart (and WMT Quick Quote WMT - Free Report) Target ( earnings disappointments as indicative of a moderation in consumer spending. Faced with the rising costs of fuel and other essentials, not to mention growing talk of a slowing economy in the face of rising interest rates, consumers would be justified to rein in their spending to some extent. TGT Quick Quote TGT - Free Report) We see the Walmart and Target reports as still reflecting a very strong consumer spending environment. Consumer spending will eventually slow down in response to Fed tightening, but we didn’t see much evidence of that in the Q1 earnings reports; neither from Walmart, Target or other consumer-centric companies. Instead, these big-box retail leaders missed as a result of weak execution and failing to have the right merchandise in stores. Consumers didn’t buy the patio furniture at Walmart or appliances at Target, but they did plenty of shopping at Home Depot ( HD Quick Quote HD - Free Report) . The challenge for Walmart, Target and other retailers is not only to have the correct merchandise, but also to deal with higher expenses related to freight, payroll and other items. You can see this in the -24.4% decline in Walmart’s Q1 earnings even as its revenues increased +2.4%. For Target, earnings declined -44.9% while revenues were up +4%. The market expects these companies to pass on these higher expenses to either their customers or squeeze it out of their suppliers. The market punished them for being surprised at the profitability hit even as they failed to protect their margins. Looking at the Q1 earnings season beyond these retailers, total S&P 500 earnings are expected to be up +9.5% on +13.5% higher revenues. This is a significant deceleration from what we have been seeing in the preceding quarters, as you can see in the chart below that provides a big-picture view of earnings on a quarterly basis. Image Source: Zacks Investment Research
The chart below shows the overall earnings picture on an annual basis, with the growth momentum expected to continue. Image Source: Zacks Investment Research There is a rising degree of uncertainty about the outlook, being driven by a lack of macroeconomic visibility in a backdrop of Fed monetary policy tightening. The Ukraine situation is exacerbating pre-existing supply-chain issues, which combined with its impact on oil prices, is weighing on the inflation situation in hard-to-predict ways. The evolving earnings revisions trend will reflect this macro backdrop.