For Immediate Release
Chicago, IL – May 29, 2018 – Today, Zacks Investment Ideas feature highlights Features: Macy’s (M - Free Report) , Wal-Mart (WMT - Free Report) , Amazon (AMZN - Free Report) and Home Depot (HD - Free Report) .
Can the Sunshine for Retail Stocks Continue?
Macy’s shrinking footprint notwithstanding, it represents the department store space in this comparison chart, with Wal-Mart and Home Depot standing in for the big box discount and home-improvement spaces, respectively.
Macy’s long-standing troubles are far from over, but the company appears to be executing well in an otherwise tough environment. The stock’s strong year-to-date performance, almost the same as Amazon’s performance, is more a function of how low expectations had fallen for this department store leader rather than the discovery of a new formula that can help it compete better. That said, market participants appear to be moving away from the overly pessimistic narrative that didn’t see any role for Macy’s and its peers in Retail’s future.
Wal-Mart shares have been struggling since late-January 2018, with the market appearing unwilling to give it the flexibility and space that it routinely allows Amazon. Wal-Mart is investing in its business, both in the brick-and-mortar assets as well as the digital side, and these investments tend to come at the expense of margins and profitability. The company’s Q1 results were decent, but the positive same-store sales growth and impressive ecommerce sales failed to impress skeptical investors focused on more evidence of margin pressures. The market likely also believes that the company overpaid for its India venture through the Flipkart purchase. All in all, the company has a good strategy in place to effectively compete with Amazon in the long run. But no one should be under any illusion about how long and expensive the struggle will be.
Home Depot’s mixed quarterly report can be legitimately chalked up to the weather. But the stock’s year-to-date underperformance likely has more to do with the market’s skepticism about the outlook for the housing space as a whole which has been dealing with low housing inventory and rising mortgage rates.
Retail Sector Scorecard
We now have Q1 results from 89.5% of the retailers in the S&P 500 index. Total earnings for these Retail sector companies that have reported results are up +21.1% from the same period last year on +9.3% higher revenues, with 73.5% beating EPS estimates and 67.7% beating revenue estimates.
A big part of the positive revisions we saw ahead of the start of the Q1 earnings season reflected the direct impact of the tax law changes, which was obviously a one-off development. Had all positive revisions been a result of tax law changes, we would have seen only EPS estimates go up, with no changes to revenue estimates. But that wasn’t the case, as revenue estimates had gone up as well, which raised our hopes that the aggregate revisions trend had finally turned positive after many years being in the other direction.
Disappointingly, we are not seeing that with estimates for Q2 to the same extent, as the above chart shows. In other words, while the growth picture coming out of this earnings season is very impressive, there is not much improvement in expectations for the current and coming quarters. The recent uptrend in the exchange value of the U.S. dollar and questions about global growth will likely serve as incremental negatives for folks like us monitoring the aggregate revisions trend.
This flat aggregate revisions trend notwithstanding, June quarter estimates have actually modestly ticked down for 9 of the 16 Zacks sectors and gone up for 7 sectors. The sectors enjoying positive revisions in the aggregate include Technology, Energy, Medical, Industrial Products, Basic Materials, Business Services, and Retail.
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