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Retail Sector Fails to Impress

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Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>

Here are the key points:

  • With results from 71.8% of the Retail sector stocks in the S&P 500 out, total earnings and revenues for the sector are up +13.7% and +8.3% respectively, with 75% beating EPS estimates and 53.6% beating revenue estimates. This is a mixed showing from the group relative to other recent periods. 


  • Total earnings for the 468 S&P 500 members or 93.6% of the index’s total membership that have reported results are up +0.1% on +4.8% higher revenues, with 76.7% beating EPS estimates and 59.6% beating revenue estimates.


  • Q1 earnings and revenue growth is unsurprisingly tracking notably below what we had seen from the same group of 468 index members in the recent past, but companies beat EPS estimates roughly at the same proportion as in other recent periods (revenue beats were a lot less common).


  • Total earnings for the Tech sector (85.1% of Tech companies in the S&P 500 have reported) are down -7.7% from the same period last year on +3.1% higher revenues, with 82.5% beating EPS estimates and 71.9% beating revenue estimates. This is a weaker showing than has been the trend in other recent periods.  


  • Total earnings for the Finance sector (all results are in) are up +2.7% on 8.2% higher revenues, with 78.4% beating EPS estimates and 61.9% beating revenue estimates.  


  • Looking at Q1 as a whole, total S&P 500 earnings are expected to decline -0.2% from the same period last year on +5.0% higher revenues and 60 basis points of compression in net margins. Earnings growth is expected to be negative for 6 of the 16 Zacks sectors, with Technology and Energy as the biggest drags.


  • Driving the Q1 earnings decline is margin pressures across all major sectors even as revenues continue to grow. Tough comparisons to last year when margins got a one-time boost from the tax legislation coupled with the rise in payroll, materials and transportation expenses are weighing on margins.


  • For the small-cap S&P 600 index, we now have Q1 results from 548 index members or 91.2% of the index’s total membership. Total earnings for these 548 companies are down -19.1% from the same period last year on +3.1% higher revenues, with 55.5% beating EPS estimates and 56.4% beating revenue estimates. 


  • Looking at Q1 as a whole for the small-cap index, total Q1 earnings are expected to be down -19.9% from the same period last year on +4.5% higher revenues.


  • For full-year 2019, total earnings for the S&P 500 index are expected to be up +2.2% on +3.2% higher revenues, which would follow the +23.3% earnings growth on +8.7% higher revenues in 2018. Double-digit growth is expected to resume in 2020, with earnings expected to be up +10.8% that year.


  • For 2019 Q2, total earnings for the S&P 500 index are expected to be down -1.6% on +4.4% higher revenues. Estimates for Q2 as well as full-year 2019 have come down, with the current +2.2% growth rate for full-year 2019 down from +9.8% in early October 2018.


  • The magnitude and pace of negative revisions to Q2 estimates compares favorably to what we had witnessed ahead of the start of the Q1 earnings season. 


  • The implied ‘EPS’ for the index, calculated using current 2019 P/E of 17.5X and index close, as of May 21st, is $164.07. Using the same methodology, the index ‘EPS’ works out to $181.83 for 2020 (P/E of 15.8X). The multiples for 2019 and 2020 have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year.


Macy’s (M - Free Report) kicked off the Q1 reporting cycle for the traditional retailers with an earnings beat and modest miss on the top-line, but the company provided a tepid same-store sales guidance and flagged the emerging tariffs headwind. The Macy’s report doesn’t look that bad now, particularly after seeing the disappointing numbers from Kohl’s (KSS - Free Report) , Nordstrom (JWN - Free Report) and others. 

The department store stocks have been under pressure for a while now and the pressure is unlikely to ease following the Q1 results unless they can provide a far more positive outlook on the same-store sales front. The enhanced tariffs aren’t helping the situation either. Unless they can pass on the increases to consumers, the tariffs will be a direct hit to these companies’ profitability.

We now have Q1 results from 28 of the 39 retailers in the S&P 500 companies. Total earnings for these 20 retailers are up +13.7% from the same period last year on +8.3% higher revenues, with 80% beating EPS estimates and 50% beating revenue estimates. The comparison charts below put these results in a historical context.



The comparisons charts above provide a mixed picture, with EPS beats tracking above or about in-line with historical periods while revenue beats are tracking below what we had seen from the same group of retailers in the past. Given how low expectations had been ahead of the start of this earnings season, this is a fairly weak showing from the traditional operators.

With respect to growth, earnings growth is tracking below what we had seen from the same group of 28 retailers in the past, but revenue growth is tracking either better or in-line with historical periods. 

Please note that the Zacks Retail sector also includes the online vendors like Amazon (AMZN - Free Report) and restaurant operators like McDonalds (MCD - Free Report) , in addition to the traditional brick-and-mortar operators. A big part of the reported results from the 28 retailers are comprised of such online vendors or restaurant operators.

Amazon’s +118.6% higher earnings on +17% higher revenues in Q1 is likely having an outsized bearing the sector’s growth picture. The comparisons charts below show the reported growth picture with and without the Amazon numbers.



Looking at Q1 expectations as a whole for the sector by combining the actual results that have come out with estimates for the still-to-come companies, total Retail sector earnings are expected to be up +11.2% on +7.2% higher revenues. Excluding Amazon, the sector’s Q1 earnings would be up a mere +2.5% from the same period last year on +6% higher revenues.

Q1 Expectations as a whole

Looking at Q1 as a whole, combining the actual results from these 468 S&P 500 members with estimates from the still-to-come companies, total S&P 500 companies are expected to be down -0.2% on +5.0% higher revenues.

The chart below of quarterly year-over-year earnings and revenue growth for the S&P 500 index shows estimates for the current and following three quarters and actual results for the preceding 5 quarters.



Driving the negative growth in the first half of the year is tough comparisons due to huge boost to profitability in the year-earlier period. The chart below puts earnings growth expectations for full-year 2019 in the context of where growth has been in recent years and what is expected in the next two years.



The market appears to have priced the deceleration in growth this year in the hope that growth resumes from next year onwards. It is in the context of these lowered expectations that market participants find the actual Q1 results reassuring. The key issue will be if expectations for the second half of the year and beyond will hold or come down as we move through the remainder of the year.

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