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Taking Stock of the Retail Sector After the Q1 Earnings Season

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The market is starting to look ahead to the June-quarter earnings releases that will start coming out around mid-July. But it is useful to discuss some of the notable trends that we saw in the Q1 earnings season and how estimates for the current period (2024 Q2) are evolving.

The Retail sector earnings results showed that while sales are still growing, a reflection of a largely stable consumer spending backdrop, companies struggled to convert the top-line gains into profitability growth. On a more basic level, retail companies found it hard to beat the Zacks Consensus estimates for EPS and revenues relative to other recent periods.

There are some ‘green shoots’ on the horizon and not everything is bad for the retailers. A number of retailers noted stabilization in the discretionary category of products that have persistently been under pressure in the post-Covid period. Costco (COST - Free Report) reported positive comps for its discretionary categories while Target (TGT - Free Report) noted signs of stabilization in its discretionary product categories.

Costco and Target have a relatively higher income customer base and the overall spending trends for that income segment continue to be strong. Costco and Target are hardly the only retailers that showed this favorable trend, as a number of other players also reported improving trends.

There is undoubtedly stress at the lower end of income distribution, as would be expected after two years of inflationary pressures. But even lower income consumers are still spending, as we saw with the Dollar General (DG - Free Report) earnings release that showed strong comps on the back of foot traffic partly offset by reduced basket size. Dollar General management attributes this behavior of more frequent visits and fewer items in the basket as reflective of financial stress.

For the current period (2024 Q2), the expectation is of earnings growth of +8.7% on +4.5% revenue growth. Estimates have held up very well, relative to other recent periods, as the chart below shows

For more details on the overall earnings picture, including evolving expectations for Q2 and beyond, please check out our weekly Earnings Preview article here >>>>Previewing the 2024 Q2 earnings season

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