August 8, 2017

Earnings Update: What to Expect from U.S. Department Stores

by Jharonne Martis

Mall closures around the U.S. have many wondering how long department stores will last, unless they can reinvent the shopping mall experience. Shoppers continue to gravitate towards the off-price retailers, such as Ross and TJX Companies, that have stolen market share from department stores. In the cosmetics sector, Sephora and Ulta continue to steal the department stores’ market share.

Department stores are getting ready to report Q2 financial results. Despite facing easy same store sales from a year ago, none are expected to report positive Q2 2017 comps (Exhibit 1). The same can be said for earnings growth rates; they are all negative. This week, Macy’s is expected to post the weakest SSS estimate at -3.2% below last year’s 2.0% result. Still, Sears Holdings has the weakest estimate in the group at -7.1%, below last year’s 5.2%.

Exhibit 1: Department Store Same Store Sales and Earnings Growth Rates

Source: Thomson Reuters I/B/E/S estimates

Bearish analyst reports

According to StarMine, this might not be the end of the bad news. The bulk of the department stores score in the bottom tertile on the Analyst Revisions Model (ARM), which means analysts polled by Thomson Reuters are bearish on these retailers and are lowering earnings estimates for the quarter.

Credit deterioration

To determine which U.S. department stores may be in danger of default in 2017, we looked at our StarMine Combined Credit Risk (CCR) model, the most comprehensive StarMine credit model. Last year, most of these department stores had been in the riskiest quartile of all retailers likely to default. This year, however, those scores have fallen lower, placing most of the retailers in the bottom decile. Six out of seven stores rank in the bottom of the StarMine CCR model score. These scores correspond to implied credit ratings of BB- or worse, suggesting these stores are not financially stable.  For example, Macy’s has a score of 9 corresponding to a BB- implied credit rating, according to the model. And, the fact that the CCR scores continue to fall suggest that the danger of default has become greater for the department stores.

Exhibit 2: StarMine Combined Credit Risk Model Scores – Department Stores

Source: Thomson Reuters StarMine

Job security concerns

The consumer’s propensity to spend money hasn’t improved. In fact, the Thomson Reuters consumer sentiment index continues to cool off, suggesting Americans are concerned about their job security. The drop in consumer confidence is also reflected in the Thomson Reuters Retail and Restaurant Earnings Index which is expected to grow in the low single digits in the second quarter of 2017.

Earnings

The Q2 2017 blended earnings growth estimate is 2.9%.

Of the companies in our Retail/Restaurant Index, 57% have reported Q2 2017 EPS. Of the 126 companies in the index that have reported earnings to date for Q2 2017, 63% have reported earnings above analyst expectations, 10% reported earnings in line with analyst expectations and 27% reported earnings below analyst expectations.

Revenue

The 2Q 2017 blended revenue growth estimate is 4.1%.

Sixty percent have reported revenue above analyst expectations and 40% reported revenue below analyst expectations.

Exhibit 3: Q2 2017 Earnings Dashboard

Source: Thomson Reuters I/B/E/S estimates

Negative guidance

What’s more, retailers reporting second quarter earnings are already warning us not to expect much from them in the third quarter. Retailers have issued negative EPS guidance 18 times for Q3, while eight companies have issued positive EPS guidance.

Exhibit 4: Earnings and Revenue Guidance

Source: Thomson Reuters I/B/E/S estimates

Same store sales

Of the 21 retailers that have reported Q2 Same Store Sales, 43% exceeded estimates, while 57% missed.

Exhibit 5: Retail Same Store Sales Scorecard – Q2 2017

Source: Thomson Reuters I/B/E/S estimates

Restaurant same store sales

Of the 26 restaurants that have reported Q2 Same Store Sales, 58% exceeded estimates, while 42% missed.

Exhibit 6: Restaurant Same Store Sales Scorecard – Q2 2017

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