May 14, 2012

Earnings Roundup: As Positive surprise rate dips, the Focus Shifts to Retailers

by Greg Harrison

Another week closer to the end of the first-quarter earnings season – and another decline in the rate at which companies in the S&P 500 index are beating analysts’ estimates. After a hot start (see Exhibit 1), this has now fallen to 66% from a high of 82% on April 19. Still, it isn’t all bad news: the rate remains above the long-term average of 62%, and, importantly, the rate of earnings growth reported by those companies continues to increase.

The consumer’s health was at the heart of corporate earnings last week, as companies in the Consumer Staples and Consumer Discretionary sectors reported their results. All five Consumer Staples companies reported better-than-expected results, while eight of the 11 Consumer Discretionary that announced their first-quarter results posted positive surprises. The Thomson Reuters/University of Michigan consumer sentiment index also gave an optimistic reading on Friday morning of 77.8, its highest point since 2008. That indicates that consumers are more confident about their employment prospects and thus more willing to spend, whether it’s a question of investing in a new car or making an impulse purchase of a pair of new shoes on a visit to the mall.

Within the Consumer Staples group, Tyson Foods Inc (TSN.N) was among those posting a positive surprise, bearing out a recent StarMine prediction. Although the company is better known for its chicken products, Tyson actually earns the single largest portion of its revenues (41%) from beef. Despite the recent controversy over lean finely textured beef (or the now-infamous “pink slime” as it is often referred to) having reduced demand for its beef products, Tyson’s famous chicken picked up the slack in the first quarter. Super Bowl Sunday – the day on which more chicken wings are consumer in the United States than any other day of the year – also fell during the first quarter, giving Tyson’s chicken products a boost. Pink slime notwithstanding, Tyson Foods announced that its earnings per share for the first quarter hit 44 cents, beating the consensus estimate of 39 cents a share.

Most of the companies that have yet to report their first-quarter results are those with first quarters that wrapped up at the end of April. These include several notable retailers reported their first quarter results last week, including Macy’s, Inc (M.N), Nordstrom, Inc. (JWN.N), and Kohl’s Corporation (KSS.N). Once again, Macy’s led the group, beating analysts’ expectations by 7% and posting year-over-year profit growth of 43%. Looking forward, Macy’s expects improving margins will contribute to further growth in profits. “As we get to the second half of the year, we are expecting to see some relief in terms of product costs,” CEO Karen Hoquet told the quarterly earnings conference call. “And much like last year, (when) we were strategizing what to do when costs were going up (now) we are doing the same thing in reverse.”

Another upscale department store, Nordstrom, also reported higher earnings last week, although its earnings of 70 cents a share fell short of estimates by analysts that the company would earn 75 cents during the quarter. Nordstrom attributed its earnings miss, in part, to higher expenses associated with developing its e-commerce business, which saw sales growth of 44% in the just-ended quarter. In the competitive retailing industry, offering consumers the ultimate degree of convenience is critically important. Nordstrom’s president, Blake Nordstrom, told listeners on the company’s conference call that customers are driving the growth in e-commerce.

While Kohl’s managed to beat analyst estimates, in contrast to Nordstrom, it didn’t succeed in reporting higher earnings. Rather, the retailer – which has struggled with poor profit margins as it has discounted prices on its private brands – reported an 8.7% decline in profits. Throughout the quarter, Kohl’s consistently had low inventory levels of popular items, meaning that it lost sales to rivals. During the company’s earnings conference call, CEO Kevin Mandell said he expects inventory to remain a problem during the second quarter. “Our second-quarter sales expectations, as a result, are similar to our first-quarter performance.”

This week, JC Penney Inc (JCP.N) is among the retailers expecting to report its first-quarter results. Analyst expect the company to announce a loss of ten cents but the StarMine SmartEstimate calls for a larger loss of 11 cents, meaning that there is a high likelihood of a negative surprise. Analysts who contribute their forecasts to the Thomson Reuters SSS estimates expect JC Penney to post the weakest same store sales number within the Thomson Reuters Same Store Sales Index, with a decline of 16.1%, as its customers haven’t responded favorably to the company’s attempts to eliminate most discounts and shift its product toward higher-end merchandise.

Awaiting this week’s batch of retailing earnings, investors will be interested to see whether the strong consumer confidence number will translate into higher growth across the board for retailers, or whether its beneficiaries will continue to be confined to discounters and luxury brands.

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