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Earnings Preview

The Retail sector is the only one where a significant number of Q2 earnings reports are still awaited at this stage; the reporting cycle has effectively come to an end for most of the other sectors, particularly in the large-cap S&P 500 index (plenty of small-cap reports are still to come).

Almost 92% of the S&P 500 members have already reported Q2 results, though results from more than 40% of the retailers in the index are still to come. We have 124 companies coming out with quarterly results this week, including 21 S&P 500 members that include major retailers like Home Depot (HD - Free Report) , Target Corp (TGT - Free Report) , Staples (SPLS - Free Report) , Wal-Mart (WMT - Free Report) , Gap Inc. (GPS - Free Report) , and Foot Locker (FL - Free Report) .    

We have already seen Q2 results from 56.8% of the Retail sector members in the S&P 500 index. While most of the initial retail sector reports were from online vendors and restaurant operators, most of the recent reports have been from the beleaguered department stores space with market participants pleasantly getting surprised that the sky wasn’t really falling for Macy’s (M - Free Report) , Kohl’s (KSS - Free Report) , Nordstrom (JWN - Free Report) and others.

The problems that have been weighing on these department stores like reduced foot traffic as a result of steady migration of sales to the online medium haven’t gone away. But a couple of things appear to be happening, all favorable to these retailers. First, Macy’s announcement of closing 100 locations appears to be an acknowledgement of the ‘over-stored’ ground reality. Second, inventories finally appear to be in-line with sales, which come after two back-to-back quarters when these operators were saddled with mountains of unsold merchandize as a result of weather and the aforementioned reduced foot traffic issue. Third and most important, expectations were so low from these department stores and their stocks were so beaten down that even a modest improvement have helped push them higher.

These favorable department store results notwithstanding, the overall environment still remains challenging in this space, with the longstanding competitive pressures from Amazon (AMZN) and others are only expected to increase over time. The Q2 Retail sector results that have been reported already, as a whole, are on the weak side, with growth tracking below historical periods and very few companies able to come out with positive earnings and revenue surprises. This week’s reports from Wal-Mart, Home Depot and others are expected to be better relative to the department stores, but the overall aggregate picture for the sector may not change much.

The Retail Scorecard

As of Friday August 12th, we have seen Q2 results from 25 retailers in the S&P 500 index (out of the 44 total) that combined account for 59.5% of the sector’s total market cap in the index. Total earnings for these 25 retails are up +6.5% from the same period last year, on +7.8% higher revenues, with a relatively low 52% beating EPS estimates and a very low 24% coming ahead of top-line expectations.

The side-by-side charts below compare the growth rates and beat ratios thus far with what we have seen from the same group of 25 retailers in other recent periods.

The growth comparisons (left hand chart) don’t stand out – Q2 earnings and revenue growth rates are above the 4-quarter average, but about in-line with the 12-quarter average. But the right hand chart, which is tracking the proportion of Retail sector stocks coming out with positive EPS and revenue surprises, shows that Q2 is notably weaker relative to the recent past.

The fact is that the 52% EPS beat % for the Retail sector is the second lowest for the entire S&P 500 index, behind only the Construction sector. The revenue beat % of 24% for the sector is the second lowest (Utilities is the lowest at 23.3%) of all 16 sectors at this stage.

With respect to the growth picture, which appears to be in-line with the recent past, we have to dig a bit deeper to adjust the sector’s growth picture for Amazon’s blockbuster Q2 earnings report. This becomes clear by looking at the left hand chart above, with and without the Amazon numbers.

The right-hand chart above, showing the sector’s growth comparison on an ex-Amazon basis, clearly shows that Q2 is tracking way below what we have been seeing from these same retailers in the recent past.

The Q2 Earnings Scorecard (as of August 12th)

We now have Q2 results from 459 S&P 500 members that combined account for 92.3% of the index’s total market capitalization. Total earnings for these 459 companies are down -3.6% from the same period last year on -0.6% lower revenues, with 71.5% beating EPS estimates and 52.9% coming ahead of top-line expectations.

The table below provides the current scorecard

The first column of the above table shows what percentage of each sector’s total members have reported results; the second column shows what percentage of that sector’s total market cap has reported results. As you can see, the reporting cycle has ended for five sectors already. The Retail sector is the only one that has exactly half of its results still awaited.

The side-by-side charts below compare the results thus far from the 459 index members with what we have seen from the same group of index members in other recent periods. The left-hand chart compares the earnings and revenue growth rates with historical periods while the right-hand chart is doing the same comparisons for positive EPS and revenue surprises.

Here are the takeaways from these comparison charts are:

First, the earnings growth (green bars in the left-side chart above) remains negative, but it is an improvement over what we saw in the preceding quarter and the average growth pace for these 459 index members in the preceding four quarters.

Second, revenue growth (orange bars in the left-side chart) is also negative, but is tracking above what we saw from this group of 459 S&P 500 members in 2016 Q1 and the 4-quarter average.

Third, positive EPS surprises (green bars in the right-side chart) for this group of companies are about in-line with historical periods, suggesting that estimates may not have been that low after all.

Fourth, comparisons for positive revenue surprises are mixed – they are below the preceding quarter and the 12-quarter average, but modestly above the 12-quarter average.

Standout Sectors

Results in the Technology and Medical sectors have been notably better than expected. Autos, Industrial Products, Aerospace and Finance are some of the other sectors whose results came in better than expected. Growth is notably strong in the Construction sector, but the proportion of sector companies beating EPS and revenue estimates is tracking below the index’s level.

For the Technology sector, we now have results from 89.2% of the sector’s total market cap in the index. Total earnings for these Tech companies are down -0.8% from the same period last year on +3.1% higher revenues, with 82% beating EPS estimates and 72% beating revenue expectations.

The comparison charts below compare the sector’s results thus far with what these same Tech companies had reported in other recent periods.

This is a better growth performance than we have seen from the same group of Tech companies in the preceding quarter. With respect to positive surprises, they are tracking above historical periods for both earnings and revenue beats, as the comparison charts above show. No doubt market participants are so excited for the results from Facebook (FB - Free Report) , Google’s parent Alphabet (GOOGL - Free Report) and even Apple (AAPL) and Microsoft (MSFT - Free Report) .

The table below shows the sector’s scorecard at the medium industry level. As you can see, all of the sector’s growth is coming from the Software/Services industry where Alphabet had +44.3% earnings growth on +22.1% higher revenues while Facebook had +158% growth in earnings on 59.2% higher revenues. The weak growth picture for the hardware industry (Computer – office Equipment) is due to Apple and IBM, with Apple’s earnings down -27% on -14.6% lower revenues. 

Expectations for the Quarter As a Whole

Looking at Q2 as a whole, combining the actual results from 459 index members with estimates for the still-to-come 41 companies, total S&P 500 earnings are expected to be down -3.3% on -0.4% lower revenues, with growth in negative territory for 7 of the 16 Zacks sectors. The Q2 growth pace has ‘improved’ as companies have come out with improved results, but the quarter is still on track to be in the negative for the 5th quarter in a row.

As has been the pattern in other recent periods, the Energy sector remains the biggest drag on the aggregate growth picture, with total earnings for the sector expected to be down -78.9% on -26% lower revenues. Excluding the Energy sector, earnings for the rest of the index would be slightly up 0.2%.

The table below shows the summary picture for Q2 contrasted with what was actually achieved in the preceding period.

While Energy stands out for its very tough comparisons, there is not much positive growth coming from the other major sectors either. The Finance and Technology sectors, the two biggest earnings contributors in the S&P 500 index, are not helping the aggregate growth picture either.

For the Finance sector, total Q2 earnings are expected to be down -5.2% on -0.4% lower revenues, which will follow -6.9% decline in the sector’s earnings in the preceding quarter.

The Technology sector, total earnings are expected to be down -0.1% on +2.7% higher revenues, which would follow the sector’s -4.5% earnings decline on +0.4% higher revenues in Q1. The big culprit for the Tech sector’s weak showing this quarter (as well as last one) is Apple (AAPL), whose June quarter earnings were down -27% on -14.6% lower revenues from the same period last year. Excluding Apple, the Tech sector’s Q2 earnings would be up +6.6% (Apple alone brings in roughly a fifth of the Tech sector’s total earnings).

On the positive side, Q2 earnings are expected be up at Autos (+16.3%), Construction (+7.5%), Conglomerates (+20.6%), and Utilities (+8.3%).

Expectations Beyond Q2

The chart below shows current quarterly earnings growth expectations for the index in 2016 Q2 and the following four quarters contrasted with actual declines in the preceding four quarters. As you can see, Q2 is on track to be the 5th quarter in row of earnings declines and estimates of Q3 growth starting to go deeper into negative territory as well.

The only meaningful positive earnings growth this year is expected to come from the last quarter of the year, which is then expected to continue into 2017 when earnings for the S&P 500 index are expected to be up in double-digits. We will see if those estimates will hold up as we reach the last quarter of the year. But given what we have seen over the last few quarters, the odds don’t look that favorable.

Note: Sheraz Mian regularly provides earnings analysis on and appears frequently in the print and electronic media. In addition to this Earnings Preview article, he publishes the Zacks Earnings Trends report every week.

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Here is a list of the 124 companies reporting this week, including 21 S&P 500 members.

Company Ticker Current Qtr Year-Ago Qtr Last EPS Surprise % Report Day Time
SYSCO CORPSYY0.60.529.52%MondayBTO
CLEAN DIESELCDTI-0.46-0.8-10.00%MondayBTO
ECO-STIM ENERGYESES-0.22-0.52-9.09%MondayBTO
FORBES ENERGYFES-0.81-0.41-33.73%MondayBTO
VASCULAR BIOGNCVBLT-0.2-0.15-23.53%MondayBTO
ASURE SOFTWAREASUR-0.020.04-650.00%MondayBTO
CELSION CORPCLSN-0.21-0.270.00%MondayBTO
MERUS LABS INTLMSLI0-0.01-200.00%MondayBTO
PATRIOT NATIONLPN0.190.09-10.00%MondayBTO
SORL AUTO PARTSSORL0.180.12-85.71%MondayBTO
VUZIX CORPVUZI-0.13-0.17-73.33%MondayBTO
EVOKE PHARMAEVOK-0.43-0.52-18.42%MondayAMC
ALARM.COM HLDGSALRM0.1-0.3122.22%MondayAMC
ASTERIAS BIOTHRAST-0.19-0.1-80.00%MondayAMC
FAMOUS DAVESDAVE0.120.1887.50%MondayAMC
SITO MOBILE LTDSITO-0.04-0.07-75.00%MondayAMC
AVINO SILVER&GDASM-0.010.01-100.00%MondayAMC
BARFRESH FD GRPBRFH-0.03-0.020.00%MondayAMC
CINEDIGM CORPCIDM-1.25-1.320.00%MondayAMC
FOUNDATION HLTHFDNH-0.020.03-1400.00%MondayAMC
FIFTH STREET AMFSAM0.120.19-20.00%MondayAMC
GOL LINHAS-ADRGOL-2.45-4.7122.50%MondayAMC
ONE GROUP HOSPSTKS0.05-0.04-100.00%MondayAMC
ANGLOGOLD LTDAUN/A0.06-360.00%MondayN/A
HOME DEPOTHD1.951.717.46%TuesdayBTO
TJX COS INC NEWTJX0.80.88.57%TuesdayBTO
ADVANCE AUTO PTAAP2.142.27-3.83%TuesdayBTO
DICKS SPRTG GDSDKS0.680.772.04%TuesdayBTO
COTY INC-ACOTY0.060.05-25.00%TuesdayBTO
G&K SVCS AGK0.950.830.00%TuesdayBTO
GWG HOLDINGSGWGH-0.44-0.32411.11%TuesdayBTO
CHINA LODGINGHTHT0.380.37100.00%TuesdayBTO
MOMO INC -ADRMOMO0.080.01-40.00%TuesdayBTO
XBIOTECH INCXBIT-0.35-0.2217.95%TuesdayBTO
OSI SYSTEMS INCOSIS0.491.22-1.54%TuesdayAMC
CREE INCCREE0.05-0.3-50.00%TuesdayAMC
21VIANET GP-ADRVNET-0.12-0.16-111.11%TuesdayAMC
POPEYES LA KTCHPLKI0.470.44-7.94%TuesdayAMC
LOWES COSLOW1.411.22.35%WednesdayBTO
ANALOG DEVICESADI0.760.773.23%WednesdayBTO
TARGET CORPTGT1.131.227.50%WednesdayBTO
STAPLES INCSPLS0.120.126.25%WednesdayBTO
AMER EAGLE OUTFAEO0.210.1722.22%WednesdayBTO
CHILDRENS PLACEPLCE-0.24-0.3328.16%WednesdayBTO
EATON VANCEEV0.550.572.13%WednesdayBTO
BIO-TECHNE CPTECH0.880.8714.12%WednesdayBTO
INNOCOLL HLDGSINNL-0.62-0.54-36.11%WednesdayBTO
CITI TRENDS INCCTRN-0.050.01-17.57%WednesdayBTO
JA SOLAR HOLDGSJASO0.590.2763.64%WednesdayBTO
L BRANDS INCLB0.590.687.27%WednesdayAMC
CISCO SYSTEMSCSCO0.550.520.00%WednesdayAMC
AGILENT TECHA0.470.4412.82%WednesdayAMC
NETAPP INCNTAP0.180.04-10.00%WednesdayAMC
SYNOPSYS INCSNPS0.430.3537.50%WednesdayAMC
CACI INTL ACACI1.581.6812.00%WednesdayAMC
ACCURAY INCARAY-0.06-0.07120.00%WednesdayAMC
BRIGGS & STRATTBGG0.520.51-10.11%WednesdayAMC
SPARTAN NASH COSPTN0.570.5310.20%WednesdayAMC
NETEASE INCNTES2.561.7424.68%WednesdayAMC
KEYSIGHT TECHKEYS0.530.5116.00%WednesdayAMC
YY INC-ADRYY0.710.8213.89%WednesdayAMC
WAL-MART STORESWMT1.021.0811.36%ThursdayBTO
HORMEL FOODS CPHRL0.340.285.26%ThursdayBTO
MSG NETWORKSMSGN0.490.615.69%ThursdayBTO
PHOTRONICS INCPLAB0.140.170.00%ThursdayBTO
STAGE STORESSSI0.050.22-27.27%ThursdayBTO
TORO COTTC10.945.00%ThursdayBTO
LANCASTER COLONLANC1.060.9327.71%ThursdayBTO
TWIN DISCTWIN-0.160.0443.75%ThursdayBTO
CANADIAN SOLARCSIQ0.40.31184.62%ThursdayBTO
NAVIOS MARI ACQNNA0.110.140.00%ThursdayBTO
GAP INCGPS0.590.640.00%ThursdayAMC
ROSS STORESROST0.670.630.00%ThursdayAMC
APPLD MATLS INCAMAT0.470.336.25%ThursdayAMC
DEVRY EDUCATIONDV0.610.5716.39%ThursdayAMC
SPORTSMANS WRHSSPWH0.160.14100.00%ThursdayAMC
AMERICAS CAR-MTCRMT0.510.52-29.82%ThursdayAMC
MENTOR GRAPHICSMENT-0.030.345.45%ThursdayAMC
NEW YORK & CONWY00.03-325.00%ThursdayAMC
ESTEE LAUDEREL0.40.421.67%FridayBTO
DEERE & CODE0.951.536.85%FridayBTO
FOOT LOCKER INCFL0.910.84-0.71%FridayBTO
AVIANCA HOLDNGSAVH-0.09-0.160.00%FridayAMC
BUCKLE INCBKE0.330.49-11.11%FridayN/A