Retail Sector Earnings: Performances Remain Mixed Heading Into Q2 Reports

U.S. retail sales started the year on a softer note, but the latest reading from the Commerce Department in mid-June showed a stronger turnaround in consumer spending. Retail sales rose 0.8 percent in May and were up 0.9 percent excluding auto sales. On a year-over-year basis, retail sales were up 5.9 percent in May. April’s figures were also revised upwards from 0.2 percent to 0.4 percent growth. 

Consumers still appear to be confident about their current economic situation and have been optimistic overall. The University of Michigan’s Consumer Sentiment Index was at 98.2 in June, up from 98 in May; the Conference Board’s Consumer Confidence Index slipped from 128.8 in May to 126.4 in June, although it still remains close to 17-year highs. 

Two of the reasons consumers cited for their optimism include a strong labor market and a positive assessment of wages. The unemployment rate was at 4 percent in June, up slightly from May’s 3.8 percent rate. That uptick wasn’t entirely perceived as a negative, as labor force participation increased 0.2 percent at the same time. Average hourly earnings were up 2.7 percent year-over-year in June. 

Tax reform could be helping put a little more money into consumer’s pockets as well. And despite the continued rise in 2018, interest rates still remain relatively low, potentially spurring consumer borrowing and spending. If interest rates start rising rapidly, that could have the opposite effect. 

One area that both consumers and retailers have expressed concerns about is the potential impact of tariffs. Even though consumer goods were mostly left off the list of initial 25 percent tariffs the U.S. placed on Chinese imports on July 6, a lot of those tariffs were targeted at high-tech goods, particularly components used in manufacturing electronics and appliances. The latest round of 10 percent tariffs on $200 billion worth of Chinese imports that the U.S. announced on July 10 does include a greater number of consumer goods. 


RETAIL SECTOR 2018 PERFORMANCE. The S&P Retail Select Industry Index ($SPSIRE), is up 7.18 percent year-to-date, as of July 11. However, individual stock performance has diverged greatly within the sector, with some stocks rallying significantly so far this year, while others have continued to decline after large drops in 2017. Chart source: thinkorswim® by TD Ameritrade. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Individual Stocks vs. Retail Sector

As investors continue to watch how companies evolve their business models, blending brick and mortar with online sales, performance has been mixed across the sector.

Quite a few retail stocks have had significant rallies this year: Macy’s Inc. (NYSE: M) is up 38.48 percent year-to-date, Restoration Hardware Holding, Inc. (NYSE: RH) is up 45.24 percent, Five Below Inc. (NASDAQ: FIVE) is up 43.12 percent, Lululemon Atheletica Inc. (NASDAQ: LULU) is up 57.87 percent, Nike Inc. (NYSE: NKE) is up 22.11 percent and Kohl’s Corporation (NYSE: KSS) is up 25.32 percent, as of July 11.

Elsewhere in the sector, retail stocks including GameStop Corp. (NYSE: GME) and J.C. Penney Company Inc. (NYSE: JCP) have posted double digit declines in 2018, extending their 2017 declines.

On one hand, there are some stocks where investors seem to be expecting the worst case scenario. On the other, investor expectations appear to be extremely high elsewhere in the sector, based on the sizable run-ups in some stocks.

Commerce Evolution Continues

As many companies are reportedly increasing to invest in their e-commerce businesses, they have also reported that they have been adapting stores to utilize them as distribution centers and online fulfillment centers. 

After acquiring Whole Foods Market, Amazon.com, Inc. (NASDAQ: AMZN) has steadily rolled out grocery delivery from Whole Foods locations. Most recently, the company announced that it had expanded the service to Chicago, Houston, Indianapolis, Minneapolis and San Antonio. Walmart Inc. (NYSE: WMT) and Target Corporation (NYSE: TGT) have similarly been rolling out grocery delivery across major markets.

Shipping directly from vendors is another practice that retailers have said they have been adopting within e-commerce divisions. One potential benefit for retailers is it allows them to expand their online product assortments without having to bear the higher costs that come with carrying all the inventory.

Macy’s is one example of a retailer that has recently adopted this approach. On last quarter’s earnings call, Macy's CEO Jeffrey Gennette said it gives the company “the opportunity to massively expand our SKU counts online and then use data to hyper personalize that at a customer level.”

Expanding Services and Memberships

Many retailers have also indicated that they have continued to add services to their offerings that complement the products they sell. Some of them are one-time services, such as the installation of a TV or sound system, while others have rolled out subscription-based services. If successful for a company, subscription-based services could potentially provide consistent revenue streams with higher profit margins, as well as help build customer loyalty and encourage repeat purchases.

Best Buy Co. Inc. (NYSE: BBY) unveiled Total Tech Support last quarter, which provides unlimited Geek Squad support for $199 a year. CEO Hubert Joly said “the services focus is increasingly becoming a core focus” for Best Buy and that “this is a core element of our brand positioning and brand identity.” Home Depot Inc. (NYSE: HD), Amazon and Lowe’s Companies, Inc. (NYSE: LOW) are just a few examples of other retailers that have added services related to the products they sell.

Companies have also been turning to annual memberships for some time now. Sharing some similarities to models that Costco Wholesale Corporation (NASDAQ: COST) and Walmart’s Sam’s Club have employed for decades, Amazon has offered Prime memberships since 2005 and Restoration Hardware rolled out its membership model in 2016. These membership models don’t always work out as retailers plan though, evidenced by Williams-Sonoma, Inc. (NYSE: WSM) discontinuing its Reserve membership program several years back. 

Major Earnings Dates

Below are some of the confirmed dates of upcoming earnings reports from companies in the retail sector: 

  • Home Depot reports before market open Tuesday, August 14
  • Walmart reports before market open Thursday, August 16, and Nordstrom’s (JWN) reports after the close the same day
  • Target and Lowe’s report before market open Wednesday, August 22
  • Gap Inc. (NYSE: GPS) reports after market close Thursday, August 23

AMZN is expected to report towards the end of July and BBY is expected to report towards the end of August. Some companies have reported recently, including FIVE, RH, COST and NKE, so it’ll be a bit until their next round of results. 

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.

© 2018 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.

This article was written by cool news network.

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