August 14, 2017

Earnings Update: What to Expect This Week from U.S. Retailers

by Jharonne Martis

About 70% of retailers and restaurants have already reported Q2 earnings. What’s in store for retailers this week? A 3.0% Same Store Sales (SSS) gain reflects healthy consumer spending, and a few retailers are poised to post healthy comps this week, including Home Depot, Citi Trends, and Coach. On the flip side, Cato Corp. is expected to post the weakest SSS estimate at -12.5%, followed by The Buckle and Urban Outfitters with comps of -8.4%, and -6.7%, respectively.

Exhibit 1: Same Store Sales and Earnings for Retailers Reporting Week of August 14, 2017

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

Coach better poised than Michael Kors

Coach’s competitor Michael Kors already beat earnings expectations last week. Both brand’s merchandise have a huge presence in the department stores, which have been struggling with weak mall traffic for some time. They have also been facing more online competition. And, in an effort to escape massive product discounting, and weak profits they have been removing their merchandise from the department stores.

Investors might want to note that Coach has proactively been pulling off more merchandise (both bags and accessories) from the department stores. Between Michael Kors, Kate Spade and Coach, the only ones where there is a clear downward trend in the total number of SKUs available at department stores is Coach bags, as Thomson Reuters discovered in a collaboration with StyleSage Co., which analyzes retailers, brands and products across the globe.

Exhibit 2: Historical Total Product Count at Department Stores: Coach and Michael Kors

Source: StyleSage Co.

What’s more, Michael Kors has a lot more apparel SKUs, which is an inherent risk factor since apparel sales have been historically weak and take on higher discounts, hurting the bottom line.  On the flip side, Kate Spade’s assortment is weighted more towards accessories (jewelry, glasses, etc) and bags, and less toward apparel.  Coach’s is similar to Kate Spade, with even fewer apparel SKUs, making Coach more likely to be affected by less discounting and experience better profits. On the other hand, the bad side of removing too much merchandise from the department stores is that consumers might not find the products they want when visiting the store.

Coach is on track to post its fifth consecutive quarter of positive and improving SSS (exhibit 3).

Exhibit 3: Coach Same Store Sales

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

Walmart

Analysts polled by Thomson Reuters are becoming more bullish on the retailer. Since last quarter, more analysts have moved their stock recommendation to a ‘BUY’.  The retailer is on track to post twelve consecutive quarters of positive same store sales. Walmart is expected to post a $1.07 EPS estimate, matching last year’s result. Thomson Reuters StarMine Earnings Quality model tells us that Walmart’s earnings are coming from sustainable sources.

In a changing retail landscape, where shoppers gravitate towards online shopping, Walmart’s tech investments seem to pay off.  Since its Jet.com acquisition, its e-commerce has grown consistently (Exhibit 4). It’s allowed Walmart to tap into a bigger and younger audience.  Jet.com is more popular among millennials, which make up the biggest portion of consumers. And, if Walmart can gain customer loyalty from this group, it’s a big plus for the retailer. As Walmart continues to compete with Amazon and expand its e-commerce portfolio, it is now in talks to acquire Birchbox.

Exhibit 4: Walmart E-commerce Growth

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

Target

Target’s second quarter earnings are expected to fall -2.5% from a year ago to $1.20/share.  However, Same Store Sales are expected to come in stronger at 0.6%, above last year’s -1.1%.  Analysts polled by Thomson Reuters also are bullish on the retailer, and have been raising their estimates since the company gave positive guidance in July.

Similar to Kohl’s, Target experienced an improvement in its stores and online traffic in July (the last month of the quarter). Still, there are concerns about how Target’s e-commerce will remain competitive in this retail climate, and its merchandise selection. Looking forward Target’s earnings growth rates are on track to post three consecutive quarters of negative growth.

Exhibit 5: Target Earnings Growth Rates

Source: Thomson Reuters Eikon

Gap

Despite facing easy comparison, Gap’s Old Navy is its only division on track to post a positive SSS at 2.8%, above last year’s flat comp. And, Gap’s earnings are expected to fall 13.4% compared to Q2 2016. Still, StarMine Earnings Quality model tells us that the retailer’s earnings are coming from sustainable sources, as cash and operating efficiency look good.

Exhibit 6: Gap Q2 2017 Same Store Sales Estimates

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

However, analysts polled by Thomson Reuters remain cautious about Old Navy’s future performance, as the retailer will face more difficult SSS comparisons this year, and promotions have been steeper in the second quarter.

Exhibit 7: Gap’s Old Navy Same Store Sales Results and Estimate

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

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