Q1 FY2014 Retail Earnings Trends

Edited by Vani Rao

Q1 results trail market expectations

The US Retail industry reported weaker-than-expected results during the first quarter of FY2014. The industry seemed to be fighting more than just the harsh winter weather, as barring a few exceptions, most retailers did not offer positive guidance for Q2 and Q3 quarters as well. The Q1 earnings season witnessed anaemic growth and a continuation of the negative guidance that has become a recurring theme every quarter for more than a year now.

During the quarter, 30 companies listed under the S&P 500 Retail Industry Index have reported their earnings. We have considered 17 stocks listed under the S&P 500 Retail Industry Index along with their Q1 results for our analysis. Among them, nine stocks have failed to beat analysts’ expectations during Q1, while seven of them have shown a negative YoY EPS growth. The total revenue of the 17 stocks listed under the S&P 500 Retail Industry Index on a sequential and YoY basis are shown below.

Total revenue of the 17 stocks from the Retail industry under our review fell 16% from $118.56 billion to $103.62 billion on a sequential basis. However, the earnings result has been better during Q1 FY2014, as compared to Q1 FY2013. The total revenue of these 17 stocks advanced 1.45% to $103.62 billion in Q1 FY2014, as compared to $102.13 billion in Q1 FY2013. Companies like The Home Depot Inc. (NYSE: HD), Lowe’s Cos Inc. (NYSE: LOW), and Target Corp. (NYSE: TGT) have contributed nearly 50% of the total revenue during Q1 FY2014.

Source: Bloomberg/WSA
Source: Bloomberg/WSA

The S&P 500 Index has advanced 3.58% over the last one month and 3.92% over the past three months. Also, the index has gained 5.54% since the beginning of 2014. The S&P 500 Retail Industry Index has advanced 4.87% over the last one month. However, over the past three months and since the beginning of 2014, the index has declined 4.28% and 4.84%, respectively.

Source: Bloomberg
Source: Bloomberg

The Energy sector has been the best performer in the S&P 500 in terms of stock prices, gaining 9.61% over the last three months and 7.90% on a year-to-date basis. The sector has also been a strong performer on the earnings front in Q1, with total earnings for the sector up 18.0% on 11.2% higher revenues.

In the Retail industry, earnings growth has been hard to come by for some time and unique issues during Q1 only added to those pre-existing challenges as the weather became a recurring challenge. The US economy’s growth numbers for the quarter provide a good context for the earnings performance of Priceline Group Inc. (NASDAQ: PCLN), Bed Bath & Beyond Inc. (NASDAQ: BBBY), and many others. During the quarter, 11 stocks out of 17 have underperformed the market expectations. Best Buy Co. Inc. (NYSE: BBY) has reported a highest positive surprise of 70.10%, while Staples Inc. (NASDAQ: SPLS) has underperformed among the 17 stocks under review. The following chart shows the estimated and actual EPS of the 17 companies during Q1.

Source: Bloomberg/WSA
Source: Bloomberg/WSA

Outlook for Q2

With positive guidance offered by many companies, analysts have become bullish on retailers, increasing both earnings and same-store sales expectations since the end of the first quarter. The US economy is likely to grow in the coming quarters, as there are signs that the underlying economy is improving steadily and that the weak results of the past three months were mainly weather-related. Employment gains, while moderate, were accompanied by robust income growth, which is likely a positive sign for future payroll improvement. However, with respect to the economy, more recent economic data points towards improved growth momentum from Q2 onwards, even though the pathway to the more aggressively optimistic GDP growth estimates is unclear at this stage.

Additionally, underlying factors such as strong corporate profitability are expected to fuel business investment in the Retail industry. While retail sales may improve in the coming quarters and analysts are looking for positive earnings in the upcoming quarters. The bulk of those companies with negative predicted surprises are in the Apparel industry. These stores continue to hurt from a lack of compelling new fashion trends. Moreover, teen apparel stores are expected to perform badly in the coming quarter since they are faced with intense competition that has had a negative impact on their market share.

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