No Shortage of Positive Retail Sector Surprises – August 18, 2017


Wal-Mart’s positive earnings report offers reassurance to those in the market that see the company’s hybrid physical store and ecommerce model as a differentiator in the broader space. This has improved the odds that Wal-Mart (WMT Free Report) will be better able to compete in the emerging retail landscape following Amazon’s (AMZN Free Report) Whole Foods purchase. Sales in the company’s ecommerce business, in which it has been actively investing lately, were up +70% from the year-earlier period and contributed nicely to the +1.7% comp growth, the 12th quarter in a row of positive same-store sales growth.

The stock’s tepid reaction to the Q2 earnings results appears more a function of the run up this year than any weakness in the report. The stock is up +15.4% in the year-to-date period, outperforming the Zacks Retail sector (up +14.3%) and the S&P 500 index (+8.7%). As such, the positives were already priced in the stock, giving market participants a sell-the-news type of opportunity. This angle explains the market’s favorable reaction to the Target (TGT Free Report) results, which has been a laggard lately, with the stock down -22.4% in the year-to-date period.

Including all of these reports, we now have Q2 results from 31 of the 40 retailers in the S&P 500 index. This week brings results from Lowe’s (LOW Free Report) , Tiffany (TIF Free Report) , Dollar Tree (DLTR Free Report) and others. Total earnings for the 31 retailers that have reported already are down -0.8% from the same period last year on +4.8% higher revenues, with 77.4% beating EPS estimates and 80.6% beating revenue estimates.

Please note that we have a stand-alone Retail sector, unlike the official Standard & Poor’s placement of this space in the Consumer Discretionary sector. The Zacks Retail sector includes, besides the traditional department stores and other brick-and-mortar retailers, the online vendors like Amazon and Priceline and restaurant operators. Results from the online vendors and most of the restaurant operators typically come out in the first phase of each reporting cycle.  

The side-by-side charts below compare the sector’s results thus far with what we have seen from the same group of 31 retailers in other recent periods.

The aggregate growth pace from the 31 retailers that have reported results already are tracking below what we had seen from the same companies in other recent periods. A big contributor to the weak earnings growth showing this quarter is the -77% drop in Amazon’s earnings on +24.8% higher revenues. Excluding the Amazon drag, Q2 earnings for the sector would be up +3.1% on +3% higher revenues. This ex-Amazon growth picture compares relatively favorably with historical periods, as the chart below shows.

Unlike growth, positive surprises are as numerous in this sector as they have been in other sectors this earnings season. In fact, the proportion of retailers beating revenue estimates is the third highest of all 16 Zacks sectors in Q2 at 80.6%, behind only the Conglomerates (83.3%) Technology (85.2%) sectors.

Q2 Earnings Season Scorecard (as of Friday, August 18, 2017)
The Q2 earnings season has come to an end for 11 of the 16 Zacks sectors, with results from 474 S&P 500 members or 94.8% of the index’s total membership already out. Total earnings for these companies are up +10.6% from the same period last year on +5.6% higher revenues, with 74.9% beating EPS estimates and 68.4% beating revenue estimates.

The table below shows the current Q2 Scorecard

The charts below compare the Q2 results thus far from the 474 index members with what we had seen from the same group of companies in other recent periods.

As pointed out earlier, the proportion of companies beating revenue estimates is tracking above historical periods (right-hand chart). The earnings and revenue growth pace for these 474 companies is below what we had seen from the same sample of companies in Q1, but an improvement over other recent periods.

Here are the four takeaways from the Q2 earnings season.

First, the earnings and revenue growth pace has steadily gone up relative to pre-season expectations. Total Q2 earnings for the index are currently expected to be up +10.3% from the same period last year on +5.4% higher revenues.

Please note that the +10.3% growth rate is the blended growth rate; it combines the actual growth for the 474 S&P 500 members that have reported with estimates for the still-to-come 26 index members. At the start of the quarter, the expectation was for earnings growth of +7.9%, which came down as the quarter unfolded, reaching as low as +5.6% just ahead of the start of the reporting season.

The deceleration in Q2 earnings growth notwithstanding, the quarter’s earnings tally is on track to reach a new all-time quarterly record, surpassing the 2016 Q4 level, as you can see in the chart below. The chart below contrasts the estimated 2017 Q2 total of $294.3 billion with the actual earnings for the preceding four quarters and estimates for the following four periods.

This record isn’t expected to last very long, with each of the coming quarters expected to bring in ever bigger earnings tallies.

Second, an above-average proportion of companies are beating estimates, particularly revenue estimates. We typically don’t give this factor a lot of weight in evaluating or assessing an earnings season since we all know that management teams are experts in managing expectations. Even then, the trend emerging in the Q2 earnings season is noteworthy for two reasons. First, estimates for the quarter had not fallen by as much as had historically been the case. Second, the proportion of positive revenue surprises, a much harder variable to manipulate relative to earnings, is really off the chart.

Third, Q2 growth is broad-based and not dependent on one or two sectors. There is strong growth contribution from the Finance, Technology and Energy sectors in Q2, but we have 13 of the 16 Zacks sectors on track to produce more earnings than the year-earlier period.

Fourth, estimates for the September quarter have started coming down, but the pace and magnitude of negative revisions compares favorably to other comparable periods. Total Q3 earnings are currently expected to be up +4.0% from the same period last year, down from +6.3% at the start of July. The chart below shows the evolution of Q3 growth expectations since the start of the period.

This is a reassuring start on the revisions front, but we will have to see if this trend will remain in place through the rest of this earnings season.

The chart below shows Q2 earnings growth expectations contrasted with what is expected in the following three quarters and actual results in the preceding 5 quarters. As you can see in the chart below, this growth pace is expected to continue through the rest of the year.

Note: Sheraz Mian manages the Zacks equity research department. He is an acknowledged earnings expert whose commentaries and analyses appear on and in the print and electronic media. His weekly earnings related articles include Earnings Trends and Earnings Preview. He manages the Zacks Top 10 and Focus List portfolios and writes the Weekly Market Analysis article for Zacks Premium subscribers.

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Here is a list of the 89 companies including 17 S&P 500 members reporting this week.

Company Ticker Current Qtr Year-Ago Qtr Last EPS Surprise % Report Day Time
BEYONDSPRNG INC BYSI -0.24 N/A -885.19% Monday BTO
58.COM INC-ADR WUBA 0.12 0.08 -140.00% Monday BTO
BAOZUN INC BZUN N/A 0 -12.50% Monday AMC
ZAYO GROUP HLDG ZAYO 0.13 0.01 30.00% Monday AMC
NORDSON CORP NDSN 1.66 1.47 3.85% Monday AMC
PREMIER INC-A PINC 0.48 0.19 10.64% Monday AMC
FABRINET FN 0.67 0.55 -22.97% Monday AMC
INPIXON INPX -1.56 -1.8 -148.28% Monday AMC
MEDTRONIC MDT 1.08 1.03 1.53% Tuesday BTO
COTY INC COTY 0.09 0.13 36.36% Tuesday BTO
TOLL BROTHERS TOL 0.68 0.62 17.74% Tuesday BTO
DSW INC CL-A DSW 0.29 0.35 -3.03% Tuesday BTO
KIRKLANDS INC KIRK -0.28 -0.22 -125.00% Tuesday BTO
NAVIOS MARI HLD NM -0.3 -0.29 -23.33% Tuesday BTO
AMER WOODMARK AMWD 1.37 1.26 13.00% Tuesday BTO
CHEETAH MBL-ADR CMCM 0.01 -0.16 N/A Tuesday BTO
DAKTRONICS INC DAKT 0.13 0.13 -20.00% Tuesday BTO
JA SOLAR HOLDGS JASO 0 0.3 250.00% Tuesday BTO
MOMO INC -ADR MOMO 0.28 0.08 42.86% Tuesday BTO
SALESFORCE.COM CRM 0.09 0.08 20.00% Tuesday AMC
INTUIT INC INTU -0.06 -0.13 1.64% Tuesday AMC
LA-Z-BOY INC LZB 0.29 0.28 23.91% Tuesday AMC
CREE INC CREE -0.09 0.06 -222.22% Tuesday AMC
ACCURAY INC ARAY -0.01 -0.09 -700.00% Tuesday AMC
ZTO EXPRESS INC ZTO 0.14 N/A 11.11% Tuesday AMC
LOWES COS LOW 1.62 1.37 -3.74% Wednesday BTO
ROYAL BANK CDA RY 1.36 1.32 6.77% Wednesday BTO
EATON VANCE EV 0.67 0.56 3.33% Wednesday BTO
EXPRESS INC EXPR -0.02 0.13 -250.00% Wednesday BTO
KLX INC KLXI 0.67 0.43 20.00% Wednesday BTO
EVINE LIVE INC EVLV -0.03 -0.02 0.00% Wednesday BTO
AMER EAGLE OUTF AEO 0.16 0.23 -5.88% Wednesday BTO
PVH CORP PVH 1.65 1.47 2.48% Wednesday AMC
HP INC HPQ 0.42 0.48 2.56% Wednesday AMC
WILLIAMS-SONOMA WSM 0.59 0.58 6.25% Wednesday AMC
HEICO CORP HEI 0.52 0.5 6.00% Wednesday AMC
SOC QUIMICA MIN SQM 0.38 0.32 2.63% Wednesday AMC
TILLYS INC TLYS 0.05 0.05 90.00% Wednesday AMC
LANNETT INC LCI 0.4 0.73 -11.49% Wednesday AMC
EDAP TMS SA-ADR EDAP -0.02 0.03 533.33% Wednesday AMC
TIFFANY & CO TIF 0.88 0.84 5.71% Thursday BTO
DOLLAR TREE INC DLTR 0.87 0.72 -1.01% Thursday BTO
SMUCKER JM SJM 1.61 1.86 4.05% Thursday BTO
SIGNET JEWELERS SIG 1.1 1.14 -37.95% Thursday BTO
HORMEL FOODS CP HRL 0.38 0.36 -2.50% Thursday BTO
PATTERSON COS PDCO 0.44 0.51 7.81% Thursday BTO
STAPLES INC SPLS 0.12 0.12 0.00% Thursday BTO
BURLINGTON STRS BURL 0.5 0.39 4.29% Thursday BTO
CDN IMPL BK CM 1.99 2.06 6.42% Thursday BTO
ABERCROMBIE ANF -0.34 -0.25 0.00% Thursday BTO
1800FLOWERS.COM FLWS -0.09 -0.14 5.56% Thursday BTO
HOEGH LNG PTNRS HMLP 0.4 0.31 10.81% Thursday BTO
TORO CO TTC 0.57 0.5 4.85% Thursday BTO
SANDERSON FARMS SAFM 3.71 2.42 6.91% Thursday BTO
DESTINATION XL DXLG 0 0 -40.00% Thursday BTO
NOMAD FOODS LTD NOMD 0.22 0.22 3.85% Thursday BTO
PERRY ELLIS INT PERY 0.1 0.15 15.28% Thursday BTO
SEADRILL LTD SDRL -0.05 0.59 220.00% Thursday BTO
STANDEX INTL CO SXI N/A 1.31 -10.91% Thursday BTO
TUESDAY MORNING TUES -0.3 -0.09 -25.93% Thursday BTO
MICHAELS COS MIK 0.16 0.17 -2.56% Thursday BTO
BROADCOM LTD AVGO 3.5 2.47 9.60% Thursday AMC
AUTODESK INC ADSK -0.37 -0.1 -19.44% Thursday AMC
ULTA BEAUTY INC ULTA 1.78 1.43 6.70% Thursday AMC
VMWARE INC-A VMW 0.84 0.69 10.77% Thursday AMC
MARVELL TECH GP MRVL 0.23 0.11 25.00% Thursday AMC
GAMESTOP CORP GME 0.15 0.27 28.57% Thursday AMC
SPLUNK INC SPLK -0.45 -0.63 6.67% Thursday AMC
PURE STORAGE PSTG -0.31 -0.31 21.05% Thursday AMC
VEEVA SYSTEMS-A VEEV 0.15 0.09 16.67% Thursday AMC
OSI SYSTEMS INC OSIS 0.91 0.55 6.25% Thursday AMC
ACETO CORP ACET 0.47 0.35 -7.14% Thursday AMC
OOMA INC OOMA -0.2 -0.19 -5.56% Thursday AMC
QAD INC-A QADA -0.12 0.06 0.00% Thursday AMC
BROCADE COMM SY BRCD 0.04 0.13 400.00% Thursday AMC
NET 1 UEPS TECH UEPS 0.43 0.49 7.69% Thursday AMC
SEADRILL PTNRS SDLP 0.25 0.79 134.38% Thursday N/A
BIG LOTS INC BIG 0.61 0.52 15.00% Friday BTO
CONCORD MED-ADR CCM -0.06 -0.06 -128.57% Friday AMC