Retail Earnings in the Spotlight with the Sector Struggling

The retail sector is in the spotlight this week with numerous earnings reports being released. We have already heard from the likes of Kohl’s (NYSE: KSS), JC Penney (NYSE: JCP), and Home Depot (NYSE: HD). There are more still to come, but the sector has been struggling to find its footing over the last few months.

The retail sales figures for April came out last week, and they showed a decline of 0.2%. So far in 2019, it has been an increase followed by a decline on a month over month basis. And that’s after a big drop in December.

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Over the last six months, retail sales have declined in four of the six, and they have declined in eight if the last nine.

In terms of the companies and the earnings reports, the number of reports that have been disappointing has exceeded the ones that have beaten estimates and surprised investors in a positive manner. The three companies I mentioned above—Kohl’s, JC Penney, and Home Depot, all three declined after their earnings’ reports. Kohl’s dropped over 10% when the stock opened for trading on Tuesday.

The sector as a whole hasn’t performed very well over the last few months. Since the beginning of February, the SPDR Retail ETF (NYSE: XRT) has been moving sideways for the most part but a recent dip has it down over that time period.

Since February 1, the XRT is down 3.44% while the S&P is up 5.03% and that’s after the recent dip in the overall market. The S&P was up as much as 8.9% from the beginning of February through the end of April, but the XRT was still lagging with a gain of only 3.76% during the same stretch.

Several retailers have indicated that if the tariffs on Chinese goods remain in place, it will start impacting the results more and more. For instance, Best Buy (NYSE: BBY) is set to release earnings on Wednesday. The company had taken the tariffs in to account when it issued its forecast back in the fall. Unfortunately, the forecast was made under the assumption that the tariff rate would be at 10% and the recent hike in tariffs took the rate up to 25%. The hike won’t have an impact on the results from the first quarter, but I am expecting Best Buy to adjust its guidance for the coming quarters.

We also had shoe companies sounding off against the tariffs on Tuesday. A letter was sent to President Trump urging him to reconsider the tariffs placed on shoes made in China. The letter was sent on behalf of almost 200 shoe companies and copies were sent to President Trump, Commerce Secretary Wilbur Ross, Treasury Secretary Steve Mnuchin, and economic adviser Larry Kudlow.

The shoe companies stated that the tariffs could end up adding $7 billion to costs and that those costs would be passed on to the consumer.

“There should be no misunderstanding that U.S. consumers pay for tariffs on products that are imported,” the letter read. “As an industry that faces a $3 billion duty bill every year, we can assure you that any increase in the cost of importing shoes has a direct impact on the American footwear consumer.”

This is not the kind of news the retail sector wants to hear right now. The industry is struggling to increase sales while inflation has been very low. Now the tariffs could create a huge increase in costs, and that would cause sales to decline even further.

As it stands, I don’t have a very optimistic outlook for the retail sector as a whole.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

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