No Shortage of Positive Retail Sector Surprises

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) will be better able to compete in the emerging retail landscape following Amazon’s (AMZN) 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) 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), Tiffany (TIF), Dollar Tree (DLTR) 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 Zacks.com 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
ANGLOGOLD LTD	AU	N/A	N/A	N/A	Monday	BTO
SASOL LTD -ADR	SSL	N/A	N/A	N/A	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
BILLITON ADR	BBL	N/A	N/A	N/A	Monday	AMC
BHP BILLITN LTD	BHP	N/A	N/A	N/A	Monday	AMC
TARENA INTL-ADR	TEDU	N/A	0.09	N/A	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
GAZIT GLOBE LTD	GZT	N/A	0.12	N/A	Tuesday	BTO
MOBILE TELE-ADR	MBT	N/A	0.14	N/A	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
ARGENX SE-ADR	ARGX	-0.33	N/A	N/A	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
ABLYNX NV	ABLYF	N/A	N/A	N/A	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

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