October 29, 2018

Q3 Looks Strong for U.S. Retail Earnings

by Jharonne Martis.

In the U.S. retail landscape, the strength seen in consumer spending continued into the second half of 2018. In fact, analysts polled by Refinitiv are becoming more bullish on consumer spending as retailers get ready to report their earnings for Q3 2018.

The Refinitiv Same Store Sales Index is now looking at a 3.6% Q3 2018 growth, up from the 1.7% SSS result posted in Q3 2017. All sectors are expected to post stronger comps this time around. The discount group is one of the strongest with a 4.0% SSS estimate, on top of a robust 3.1% comparison from last year.

Let’s dig in and find out where consumers went shopping and dining:

  • The Refinitiv consumer confidence index reached a high point last month, and is relatively steady in October.
  • The upward trend in consumer confidence is also reflected in the latest earnings guidance numbers, as retailers have been providing less negative earnings pre-announcements compared to a year ago.
  • As a result, the Refinitiv Retail and Restaurant Q3 earnings index is expected to rise 12.1%.
  • The Internet sales sector continues to have the highest earnings growth rate (49.1%) of any sector.
  • On the other hand, the Hotels, Restaurant & Leisure sector has the lowest growth rate (0.8%) of any sector.
  • The Refinitiv Restaurant Same Store Sales Index is looking at a 2.0% Q3 2018 growth, below the 2.8% SSS result posted last year.
  • Casual and fine dining are doing better than last year. On the other hand, the quick service sector is struggling, with a 2.1% SSS estimate that is below last year’s 3.7% SSS result.
  • For Q3 2018, there have been 42 retail negative EPS preannouncements, compared to 23 positive.

Q3 2018 earnings growth

The Refinitiv Retail and Restaurant Index Q3 earnings are expected to rise 12.1%. When looking at the earnings growth rates for Q3 for the 212 retailers tracked by Refinitiv, the Internet sector continues to have the highest earnings growth rate (49.1%) of any sector. Eight of the nine retailers in the sector are anticipated to see higher earnings, compared to a year ago. Amazon already saw a 466.7% jump in earnings, and Expedia Group, Inc. (24.3%) has the highest EPS growth estimate in the sector.

All sectors are expected to see a positive growth this quarter. However, the Hotels, Restaurants & Leisure sector has the lowest growth rate (0.8%). Eight of the 44 retailers in the sector are expected to see earnings declines compared to Q2 2018, led by Penn National Gaming, Inc. (-94.7%).

Exhibit 1: Refinitiv Retail Earnings Growth Rate – Q3 2018

Source: I/B/E/S data from Refinitiv.

Consumers’ emotions

Consumer confidence and spending remained healthy in 2018. The Refinitiv consumer confidence index suggests consumers are feeling good about their economic situation, better about extending themselves and spending their discretionary income. Most indices reached a high point last month, and are relatively steady in October. American consumer confidence, as measured by the Refinitiv/Ipsos Primary Consumer Sentiment Index slightly decreased by 0.3 points to 62.5. This is in line with our retail guidance data, suggesting the strength of consumer spending is well positioned going into the pivotal holiday season.

Exhibit 2: Refinitiv IPSOS consumer sentiment index

Source: I/B/E/S data from Refinitiv.

Guidance

When consumers feel good about their careers and economic situation they feel better about extending themselves. The upward trend in consumer confidence is also reflected in the latest earnings guidance numbers, as retailers have been providing more positive earnings preannouncements compared to a year-ago. As a result, the Refinitiv Retail and Restaurant Earnings Index is now expected to see double digit growth in Q3 2018.

Retailers are less pessimistic than last year. There are fewer negative EPS and revenue guidance reports for Q3 2018 vs. Q3 2017 — and more positive EPS and revenue guidance. In addition to the 42 Q3 negative pre-announcements and 23 positive for EPS, retailers posted 26 negative and 39 positive revenue forecasts (Exhibit 3). The bulk of the negative guidance (45%) comes from the apparel sector.

Exhibit 3: Q3 Earnings and Revenue Guidance


Source: I/B/E/S data from Refinitiv.

Refinitiv retail same store sales

Consumer spending improved in the third quarter of 2018 vs. last year. Likewise, analysts polled by Refinitiv are becoming more bullish on consumer spending as retailers get ready to report their earnings results for the third quarter of 2018. The Refinitiv Same Store Sales Index is now looking at a 3.6% Q3 2018 growth, up from the 1.7% SSS result posted in Q3 2017. Most retail sectors are expected to post stronger comps this time around. Despite facing difficult comps from last year, the discounters are on top with a 4.0% estimate vs. 3.1% last year. Meanwhile, the department group is on track to post its second consecutive quarter of positive comps with a 0.8% SSS estimate, above its -4.9% Q3 2017 SSS result.

Exhibit 4: Same Store Sales Sectors – Q3 2018 vs. Q3 2017

Source: I/B/E/S data from Refinitiv.

Same Store Sales winners

Furniture retailers seem to have benefited from the housing boom. As a result, the Lovesac company has the strongest SSS estimate. In apparel the hot leisure trend continues to help Lululemon. Meanwhile, consumers are buying apparel at Aritzia, American Eagle, and Urban Outfitters. Urban Outfitters divisions all have strong SSS estimates. American Eagle is also getting a boost from its Aerie division’s robust SSS estimate. Meanwhile, Tiffany & Co. is expected to post much stronger results than last year. The luxury retailer’s Japan and U.S. divisions are sparkling.

Exhibit 5: Top SSS estimates – Q3 2018

Source: I/B/E/S data from Refinitiv.

Same Store Sales losers

The usual suspects fall into this category, including Vera Bradley which has posted over three years of negative SSS. Likewise, Francesca’s Holdings is on track to post its seventh consecutive quarter of negative comps. Meanwhile, Pier 1 Imports Holdings has one of the weakest SSS estimate for the second quarter. Like other mall stores, J. Jill, and Chico’s White House Black Market have been hurting from weak mall traffic.

Exhibit 6: Bottom SSS estimates – Q3 2018

Source: I/B/E/S data from Refinitiv.

Refinitiv restaurant same store sales

Restaurants are facing difficult comparisons from last year. The Refinitiv Restaurant Same Store Sales Index is now looking at a 2.0% Q3 2018 growth, below the 2.8% SSS result posted last year. Casual and fine dining are doing better than last year. On the other hand, the quick service sector has a 2.1% SSS estimate, below last year’s 3.7% SSS result.

Exhibit 7: restaurant Same Store Sales Sectors – Q3 2018 vs. Q3 2017

Source: I/B/E/S data from Refinitiv.

Restaurant Same Store Sales winners

Domino’s Pizza, Darden, and Sonic Corp. already posted the strongest SSS results at 6.3%, 3.3%, and 2.5% respectively. McDonald’s beat its SSS estimate with a 4.2% SSS result. Other restaurants expected to post healthy SSS include Texas Roadhouse, BJ’s Restaurant and Wingstop.

Exhibit 8: Top Same store sales estimates – Q3 2018

Source: I/B/E/S data from Refinitiv.

Restaurant Same Store Sales Losers

Burger King, Del Taco Restaurants and Good Times Restaurant already missed their SSS estimates, and posted lower results compared to a year-ago. Meanwhile of those left to report, Papa John’s International and Diversified Restaurant Holdings have the weakest SSS estimates.

Exhibit 9: restaurant Bottom SSS estimates – Q3 2018

Source: I/B/E/S data from Refinitiv.

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