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August 30, 2018

Retail Earnings Point To Robust Consumer Spending

by Jharonne Martis.

Ninety percent of the companies in our Retail/Restaurant Index have reported Q2 2018 EPS. Of the 190 companies in the index that have reported earnings to date, 74% have reported earnings above analyst expectations, 7% reported earnings in line with analyst expectations and 19% reported earnings below analyst expectations. The Q2 2018 blended earnings growth estimate is 29.7%.

The bulk of retailers continue to beat expectations and post robust earnings growth. Consumers have more money in their pockets, are feeling great about their economic situation and unemployment is low. On top of that, retailers that smashed expectations are showing that their strategic investments are paying off, including Target and Walmart, which reported the strongest comps in over a decade. In a time when department stores struggle and have been closing doors, Nordstrom introduced new partnerships with strategic brands that gave its sales and margins a boost. These strategic brand sales were up 13%, making up almost half of its full-price business. Others, including Kohl’s and Best Buy, beat expectations and have partnered with Amazon, which is helping store traffic.

Here are Thomson Reuters I/B/E/S estimates for retailers reporting earnings this week:

Exhibit 1: Same Store Sales And Earnings Expectations/Results – Week Of August 29, 2018

Source: Thomson Reuters I/B/E/S

E-COMMERCE

Retailers continue to pour a lot of money into getting their e-commerce platforms up to speed. This earnings season we saw that some of these investments are paying off, and consumers are shopping online. Nordstrom said in its earnings call that in-store traffic was derived from its online business. Consumers do their research online and walk into the store already knowing what they want to try on.

E-commerce as a percentage of total U.S. sales spiked in 2018: it saw a big jump from 9.1% in Q4 2017 to 9.6% in Q2 2018. Traditionally, we see this size of growth over four quarters, suggesting that the amount of money consumers are spending online continues to grow.

Exhibit 2: E-Commerce as a Percentage of Total U.S. Sales

Source: Thomson Reuters Eikon

OUTLOOK: THOMSON REUTERS SAME STORE SALES INDEX

The Thomson Reuters SSS index is expected to see 3.2% growth in the first half of the year. A 3.0% SSS reflects healthy consumer spending. This strength is also expected to continue into the third quarter, which includes the key back-to-school season.

However, the SSS index is expected to decline in the fourth quarter to a 2.8% SSS increase, telling us that retailers will have to adjust their holiday inventory orders accordingly to account for demand. There’s also a lot of uncertainty around potential price increases towards the end of the year as tariffs on imports and products kick in. Ultimately, this will have a strong impact on how retailers prepare for the biggest shopping months of the year.

Exhibit 3: Thomson Reuters Same Store Sales Index

Source: Thomson Reuters I/B/E/S

TIFFANY’S

Tiffany’s results also suggest the consumer is spending freely, as it beat Q2 2018 earnings, revenue and same store sales estimates, and raised its full-year profit forecast. The luxury retailer sold more jewelry in China and the United States. The retailer has been expanding and opening more stores in China. This resulted in 28% rise in sales in the Asia Pacific region.

On the other hand, Europe saw the weakest same store sales growth at -4%. Still, Japan was the biggest surprise as it smashed its same store sales estimate with a robust 8.0% result.

The retailer saw strength across most products, including its Paper Flowers collection, a platinum and diamonds floral collection. Its high-end everyday home items were also well received, including items such as $350 gold straws and $1,500 gold paper clips – further indicating the strength of U.S. consumer spending.

Next year, the retailer intends to invest in a massive store renovation at its New York flagship location, and other marketing strategy investments. However, if topline sales continue to grow by similar magnitude, margins levels should remain healthy.

It looks like Tiffany’s might be well positioned for the future. Earnings are expected to grow in the high single digits for the remainder of the year. The StarMine Price Momentum high score of 92 tells us that the retailer has positive price stock momentum in its favor. Likewise, looking at the StarMine Earnings Quality model, Tiffany scores 92 out of a possible 100. Its high score suggests that profits could be from sustainable sources. The company’s cash flow and operating efficiency components also look healthy.

Exhibit 4: Tiffany’s Starmine Model Scores

Source: Thomson Reuters Eikon

RETAIL SAME STORE SALES

Of the 64 retailers that have reported Q2 Same Store Sales, 65% exceeded estimates, 2% matched while 33% missed.

Exhibit 5: Retail Same Store Sales

Source: Thomson Reuters I/B/E/S

RESTAURANT SAME STORE SALES:

Of the 35 restaurants that have reported Q2 Same Store Sales, 43% exceeded estimates, while 57% missed.

Exhibit 6: Restaurant Same Store Sales

Source: Thomson Reuters I/B/E/S

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