The third quarter earnings season has practically come to an end for most major sectors, with the retail sector being the only one still waiting for a significant number of reports, particularly from previous operators of space. We’re going to start this week with these earnings results, with a number of key players like Walmart (WMT), target (TGT) and Home Depot (HD) on the big box side and Macys (M) and Kohls (KSS) on the front of the department store.
Retail space had seen a secular transition in recent years, with consumer dollars steadily shifting to the online medium and traditional shopping malls suffering from falling foot traffic. The pandemic accelerated these pre-existing trends, with digital transformation receiving a boost. The nature of spending also changed due to social distancing and work-from-home mandates.
Traditional department stores, with their clothing-focused merchandise and large footprint, were dealt a severe blow during the reporting period. The fact that these operators were slow to switch online only added to their suffering. It’s no surprise that some of these players have been pushed over the edge by the pandemic. Macy and Kohl’s coverage this week is expected to have lost money in the quarter.
Walmart, Target and Home Depot, who also report this week, are not on the list of victims. They did well during this downturn and likely will do so in the days to come.
Walmart stock gained + 26.5% that year, well outperforming the + 10.1% increase for the S&P 500 index and the -57.5% decrease for Macy stocks. Walmart’s EPS for the third quarter is expected to grow + 1.7% versus + 3.7% higher sales. The target shares rose by + 27.2% this year. The company expects earnings per share to be + 16.2% higher with + 11.5% higher sales for the third quarter.
We typically associate the traditional brick and mortar operators as the only ones belonging to the retail space, and the traditional industry and sector classification systems assign these businesses to either the consumer discretionary or consumer staples sectors. In this system, online providers are moved into the technology sector. However, we have a separate retail sector that includes not only the traditional players, but also online providers and restaurant operators.
For the Zacks retail sector, one of the 16 Zacks sectors, we have already seen Q1 results from 20 of the 34 companies in the S&P 500 index. Most of these retail sector results, which have already been published, come from online and restaurant operators. The traditional brick and mortar businesses start reporting this week.
The total result of these already reported companies in the retail sector rose by + 15.1% to + 12.1% higher sales compared to the same period last year, with 90% exceeding the EPS estimates and an equal percentage exceeding the sales estimates. The following comparison tables put these retail sector results in historical context.
As you can see above, an above-average proportion of retailers have been able to beat estimates so far. This is behavior we’ve seen across the board across all sectors, with a much higher proportion of companies beating EPS and sales estimates this earnings season.
In terms of the sector’s earnings and sales growth pace in the third quarter (+ 15.1% earnings growth at + 12.1% sales growth) the picture changes significantly once Amazon’s results (AMZN) are removed from the sector’s aggregated reported figures will.
The online provider accounts for around 42% of the sector’s total market capitalization in the S&P 500 index and accounts for 37.3% of the sector’s total revenue already generated. We know Amazon’s earnings rose + 196.7% to + 37.4% in the third quarter.
Without Amazon’s contribution, the Zacks retail sector earnings would actually drop -15.7% in the third quarter versus + 2.9% higher sales.
The following graphic shows the growth comparison of the sector on an ex-Amazon basis.
For the entire third quarter of the Sector, total earnings, taking into account the results with estimates for the companies yet to come, are expected to decline + 11.9% year-on-year, representing an increase of + 9.4% versus sales. Without Amazon, the sector’s third quarter earnings would be -4.9% lower versus + 5.1% higher sales.
Q3 Earnings Season Scorecard (As of Friday, November 13thth)
We now have Q3 results from 463 S&P 500 members, or 92.6% of the index’s total membership. The total income (or total income) of these 463 companies was down -9% from the same period last year as sales were down -2%. 84.4% exceeded the EPS estimates and 75.8% exceeded the sales estimates.
The following two sets of comparison tables put the Q3 results of these 463 index members in a historical context that should give us an idea of how the Q3 earnings season is performing at this point in time compared to other recent periods.
The first comparison tables compare the earnings and sales growth rates of these 463 index members.
The second set of charts compares the proportion of these 463 index members outperforming EPS and revenue estimates.
As you can see above, not only is the pace of declines slowing, but a much larger chunk of businesses are exceeding EPS and revenue estimates.
The reporting cycle will slow down remarkably in the future. This week, more than 200 companies reported third quarter results, including 12 S&P 500 members. Notable companies reporting results this week include NVIDIA (NVDA), Tyson Foods (TSN), Workday (WDAY), and others, along with the retailers mentioned above.
When you look at the third quarter as a whole and combine actual results with estimates for companies to come, the index’s overall return is expected to decrease -8.6% versus -1.2% lower sales.
From a market perspective, the key factor is how the estimates for the fourth quarter of 2020 play out as we go through the rest of the third quarter reporting cycle. The trend so far is positive, as the following graphic shows.
Please note that the revision trend has apparently flattened out over the past few days and estimates are actually stalling.
The following graph gives an overview of the quarters and shows the growth in profits (green bars) and sales (orange bars) in the third quarter in relation to what has actually been achieved in the last quarters and what is expected in the coming periods .
The following graphic shows the overall view on an annual basis. As you can see below, 2020 earnings and sales are projected to decrease -17.4% and -4.2%, respectively.
The annual growth picture above roughly corresponds to an “EPS” index of $ 132.28 for 2020, compared to $ 160.04 in 2019 and $ 161.14 in 2021.
For a detailed overview of the overall results picture and expectations for the coming quarters, please read our weekly report on earnings trends >>>> Handicap the Improving Earnings Picture
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