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Earnings Preview

The earnings focus lately has been on the Retail sector, with department store results getting positive reception from the market. Investors are rewarding the department store stocks for showing some improvement in results, with tight expense controls and leaner inventories as the big drivers even as same-store sales continue to struggle. The lean inventory picture is helping raise hopes for the all-important fourth quarter for Macy’s (M - Free Report) , Nordstrom (JWN - Free Report) , and Kohl’s (KSS - Free Report) as they likely wouldn’t need to do as much discounting to move merchandize.

The current sunshine on department store stocks notwithstanding, the group’s long-standing problems haven’t gone away. These problems include steadily falling foot traffic as a result of sales moving to the online channel, which is making the group’s excessive store capacity ever more problematic. Macy’s announcement of partnering with Brookfield Asset Management with respect to its real estate portfolio, which follows the decision to close 100 locations last quarter, is step towards addressing the ‘over-stored’ ground reality.

Retail Sector Scorecard

As of Friday November 11th, we have seen Q3 results from 24 retailers in the S&P 500 index (out of the 43 total) that combined account for 59.3% of the sector’s total market cap in the index. Total earnings for these 24 retails are up +12.7% from the same period last year, on +8.6% higher revenues, with a relatively low 54.2% beating EPS estimates and a very low 37.5% coming ahead of top-line expectations. The proportion of retailers that have beaten Q3 EPS and revenue estimates is the second lowest of all 16 Zacks sectors, behind only Construction.

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 24 retailers in other recent periods.

As you can see, the group’s Q3 earnings growth compares favorably with historical periods, though top-line growth is tracking below the 4- and 12-quarter averages.

Positive surprises are notably hard to come by in Q3, both for earnings as well as revenues. While the department store results in recent days have largely been well received, the earlier reports from online vendors, restaurants and other retail spaces largely came short of expectations. We will get Retail’s complete picture following this week’s results from Wal-Mart (WMT - Free Report) , Target (TGT - Free Report) and Home Depot (HD - Free Report) , but the sector’s Q3 results thus far have at best been mixed.

Q3 Earnings Scorecard (as of 11/11/2016)

We now have Q3 results from 455 S&P 500 members or 91% of the index’s total membership. Total earnings for these 455 companies are up +3.9% from the same period last year on +2.7% higher revenues, with 72.7% beating EPS estimates and 55.4% coming ahead of revenue estimates.

The table below shows the scorecard of these 455 index members. We have reached the final phase of the reporting cycle, with only 21 S&P 500 members reporting results this week.

Any way you look at it, this is a better performance than we have seen from the same group of 455 index members in other recent periods, as the comparison charts below show.

The aggregate growth picture improves even further once the Energy sector’s drag is removed. Excluding the Energy sector, total earnings for the rest index members that have reported are up +7.5% on +4.5% higher revenues. The comparison charts below show the aggregated reported picture with and without the Energy sector.

In the comparison chart below, we are comparing the proportion of S&P 500 members that are beating both EPS and revenue estimates in Q3 with historical periods. As you can see, Q3 is tracking above other recent periods largely on account of more numerous revenue beats.

Q3 Expectations As a Whole

Combining the actual results from the 455 S&P 500 members with estimates from the still-to-come 45 index members, total Q3 earnings are now expected to be up +3.4% from the same period last year on +1.5% higher revenues. This would compare to 2016 Q2 earnings growth of -2.8% on -0.2% revenues.

The table below shows the summary picture for Q3 earnings, revenues and margins contrasted with the corresponding results from Q2.

The +3.4% earnings growth in Q3 is the first positive growth for the index after 5 quarters of back-to-back declines. The growth picture improves once the Energy sector’s drag is excluded, as you can see in the table above (+6.7%).

The Q3 earnings growth may not be much, but it is nevertheless a notable improvement over what we saw in the preceding 5 quarters, as the chart below shows.

As you can see in this chart, positive growth was expected to show up in the last quarter of the year, with pre-season expectations putting Q3 growth to be in negative territory. In other words, not only has the earnings recession finally come to an end, but positive growth has arrived ahead of schedule. In a way, Q3 can be seen as an inflection point,

Expectations Beyond Q3

The chart below shows current bottom-up consensus earnings expectations for the index in 2016 Q3 and the following four quarters contrasted with actual results in the preceding four quarters. Please note that the columns represent bottom-up earnings totals for each quarter in billions of dollars while the line represents the quarterly growth rates.

The Energy sector drag is expected to end in 2016 Q4 and beyond, as the chart below of the sector’s earnings shows.

The improved Energy sector outlook makes sense, given shifting comparisons and the improvement in oil prices. But we will have to wait to find out if estimates for the other sectors will hold up as companies report Q3 results and provide guidance for Q4 and beyond.

It will be interesting to see if the decelerated pace of negative revisions that we saw the last earnings season will get repeated this time as well.

Note: Sheraz Mian regularly provides earnings analysis on Zacks.com 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 21 S&P 500 members reporting next week.


 

Company Ticker Current Qtr Year-Ago Qtr Last EPS Surprise % Report Day Time
Transdigm GroupTDG3.072.735.00%MondayBMO
Advance Auto PtAAP1.741.95-10.80%MondayAMC
Home DepotHD1.581.350.51%TuesdayBMO
Tjx Cos Inc NewTJX0.870.865.00%TuesdayBMO
Agilent TechA0.520.54.26%TuesdayAMC
Lowes CosLOW0.970.8-3.52%WednesdayBMO
Target CorpTGT0.830.867.89%WednesdayBMO
Cisco SystemsCSCO0.540.545.45%WednesdayAMC
L Brands IncLB0.40.5518.64%WednesdayAMC
Netapp IncNTAP0.380.4555.56%WednesdayAMC
Smucker JmSJM1.941.626.29%ThursdayBMO
Wal-Mart StoresWMT0.961.034.90%ThursdayBMO
Best BuyBBY0.470.4135.71%ThursdayBMO
Helmerich&PayneHP-0.430.04-11.90%ThursdayBMO
Staples IncSPLS0.340.350.00%ThursdayBMO
Gap IncGPS0.60.631.69%ThursdayAMC
Ross StoresROST0.560.535.97%ThursdayAMC
Intuit IncINTU-0.17-0.0943.48%ThursdayAMC
Salesforce.ComCRM0.030.0040.00%ThursdayAMC
Appld Matls IncAMAT0.650.296.38%ThursdayAMC
Foot Locker IncFL1.101.003.30%FridayBMO