Sizing Up The Retail Sector's Earnings Picture

The Retail sector is the only one where a significant number of Q2 earnings reports are still awaited at this stage; the reporting cycle has effectively come to an end for most of the other sectors, particularly in the large-cap S&P 500 index.

Almost 90% of the S&P 500 members have already reported Q2 results, though results from more than half of the retailers in the index are still to come. We have more than 400 companies coming out with quarterly results this week, including 16 S&P 500 members that includes major retailers like Macy’s (M -Analyst Report), Nordstrom (JWN -Analyst Report) and Kohl’s (KSS -Analyst Report).    

While plenty of Retail sector reports are still to come, the sector has had a fairly good run thus far in the Q2 earnings season. It appears that the sector’s greater domestic orientation is helping it from the strong dollar issue that has been the persistent concern in most other sectors. Yet, improving consumer buying power as a result of a stronger labor market and lower energy expenses are benefiting retailers. The sector’s strong stock-market performance lately is likely a reflection of this favorable backdrop – it has outperformed the S&P 500 index and trails only Medical and Consumer Staples, among the major sectors, year to date.

The Retail Scorecard

As of Friday August 7th, we have seen Q2 results from 21 retailers in the S&P 500 index (out of the 43 total) that combined account for 56.2% of the sector’s total market cap in the index. Total earnings for these 21 retails are up +7.7% from the same period last year, on +12.6% higher revenues, with 71.4% beating EPS estimates and 47.6% coming ahead of top-line expectations.

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 21 retailers in other recent periods.

 

As you can see, the performance momentum for this group of 21 retailers was very much present in the preceding quarter as well, though results are nevertheless above historical levels.

The Q2 Scorecard

As of August 7th, we have seen Q2 results from 444 S&P 500 members that combined account for 89.4% of the index’s total market capitalization. Total earnings for these companies are down -2.5% on -4.2% revenue losses, with 70.6% beating EPS estimates and 50.1% coming ahead of revenue expectations.

Figure 1 below shows the current Scorecard for the 444 index members that have reported results.

Figure 1: 2015 Q2 Scorecard (as of 8/07/2015)
 

Putting Q2 Results in Context  

Figure 2 below shows the comparison of the results thus far with what we have been seeing from the same group of 444 companies in other recent quarters.

Figure 2: 2015 Q2 Results Compared
 

The left-hand side chart compares the earnings and revenue growth rates for these 444 S&P 500 members with what these same companies reported in the preceding quarter and the average growth rates for these companies in the preceding four quarters (the 4-quarter average is through 2015 Q1). The right-hand side chart does the same comparison for these 444 S&P 500 members, but compares only the earnings and revenue beat ratios.

Here are the takeaways from looking at this chart

1. The earnings growth rate (-2.5%) is notably weaker compared to other recent quarters.
2. Similar to the earnings growth pace, the revenue growth rate (-4.2%) is below what we saw from this group of companies in Q1 (-3.9%) as well as in the 4-quarter average (+1.8%).
3. The earnings beat ratio (70.6%) is tracking above what we saw from this group of companies in Q1, though remains in-line with the 4-quarter average.
4. The revenue beat (50.1%) ratio is better than what these same companies reported in the preceding quarter, and slightly below the 4-quarter average.

The Energy Drag

With most of the Energy sector’s results already out (97.5% of the sector’s market cap in the index have reported), total earnings for the sector are down -60.4% on -31.6% lower revenues, with only 69.2% beating EPS estimates and 53.8% coming ahead of top-line estimates.

This is the weakest performance that we have seen from the sector in any other recent quarter and remains a big drag on the aggregate growth picture for the S&P 500 index. Excluding the Energy sector results, total earnings for the rest of the index members that have reported results would be up +5.6% from the same period last year on +1.3% higher revenues. But as you can see in the side-by-side comparison charts of the index’s growth picture with and without the Energy sector, the index’s growth pace would still be below other recent periods even without the Energy sector.

The Finance Effect

Total earnings for the 89.2% of the Finance sector’s market cap that has reported results are up +8.8% on +1.3% higher revenues, with 68.3% beating EPS estimates and 65.9% coming ahead of top-line expectations. This is better performance than we have seen from this group of Finance sector companies in other recent quarters. The sector’s earnings picture has benefited from a combination of fewer litigation charges, tighter expense controls, and modest improvements in core business lines in an otherwise still unfavorable interest rate backdrop.

Figure 3 below compares the Finance sector results thus far with what we have been seeing from the same group of companies in other recent quarters.

Figure 3: Finance Sector Q2 Results Compared

Please keep in mind that a big part of the +16.2% earnings growth for the sector in the preceding quarter was thanks mostly to easy comparisons at Bank of America (BACBAC - Analyst Report). Adjusted for the Bank of America results, Q2 earnings growth for the sector is tracking better relative to the recent past. Revenues of course are a different matter, as briefly referred to earlier. These results have been better than expected, as the right-hand side chart above shows.

As we did with the Energy sector’s impact, the side-by-side charts below compare the growth results thus far with and without the Finance sector.

Figure 4: Q2 Results Outside of Finance compared

 

The Composite Picture for Q2

Figure 5 below presents the composite summary picture for Q2 contrasted with what companies actually reported in the 2015 Q1 earnings season. Basically, the table below presenting Q1 as a whole, combining the actual results from the 444 S&P 500 members that have reported with estimates from the still-to-come 56 index members.

Figure 5 – The Composite Summary Picture

As you can see in the above summary table, total Q2 earnings are expected to be down -1.5% from the same period last year on -3.5% lower revenues, with Energy as the biggest drag on the growth rate. Excluding Energy, total earnings for the remainder of the S&P 500 index would be up +5.8% on +1.2% revenues. Among the major sectors, Finance and Medical are big growth contributors this quarter, with Finance sector earnings expected to be up +9.7% and Medical earnings up +15.9%. Excluding Finance, total S&P 500 earnings would be down -4.3% on -4.1% lower revenues.   

Putting Q2 Growth Expectations in Context

Figure 6 below shows current consensus earnings growth expectations for the coming quarters contrasted with what is expected for Q2 and what was actually achieved in Q1. As you can see, not much in expected in the second half of the year either. But the growth pace is expected to materially ramp next year, with full-year 2016 earnings expected to be up in double digits.

Figure 6: Quarterly Earnings Growth estimates

These optimistic looking expectations for the outer periods aren’t unusual – Wall Street analysts always tend to be more optimistic about the future. But estimates start coming down as the period in question comes closer. The erosion of 2015 growth estimates was driven largely by what happened to the Energy sector. But estimates for other sectors came down as well…and we will likely see something similar to current 2016 estimates as well.