Retail Earnings Next Week – Expectations are Ugly

I am a big fan of the movie Moneyball. I’m a sports junkie and I love statistics, so the movie was right up my alley. One of the lines that stands out from that movie is when Billy Beane, played by Brad Pitt, is talking to his head scout. Beane utters three simple words, “Adapt or die.”

Those same words appear to be the theme for the retail sector at this time—adapt or die. Traditional retailers will have to adapt or they will be going out of business. I have written about the retail sector several times in the past and I even included them in last week’s article about industries that have likely changed forever due to the current pandemic.

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Several retailers have filed for bankruptcy already, most notably J. Crew and Neiman Marcus, and a number of others are hanging on by a thread. Now the industry is getting ready to step into the earnings spotlight and the expectations for most of the companies are downright ugly.

Looking through the earnings calendar for next week, I took note of 10 retailers that will report between May 18 and May 22 and there are more, I just chose these 10 because of the trading volume they see and how widely held the stocks are. Of the 10, eight are expected to see earnings decline from the same quarter a year earlier. Three of the companies are expected to go from earnings to losses. Only two companies are actually expected to see earnings grow compared to last year.

The two companies that are actually expected to see earnings grow are Lowes (NYSE: LOW) and Walmart (NYSE: WMT). Lowes is expected to see earnings growth of 7.38% and Walmart is expected to see growth of 3.54% – very modest gains, but gains never the less. Both of these companies also have a decent online presence.

The worst declines are expected to come from Nordstrom (NYSE: JWN), Kohl’s (NYSE: KSS), and T J X (NYSE: TJX), the parent company of T.J. Maxx. All three of these companies are expected to move from positive earnings per share to losses. Nordstrom is looking at going from $0.23 EPS to losing $0.95 per share—a decline of 513%. Kohl’s is expected to move from EPS of $0.61 to a loss of $1.75 per share. That is a change of -387%. TJX is expected to move from EPS of $0.57 to a loss of $0.15 per share, a drop of -126%.

Of the other five companies, Home Depot (NYSE: HD) is expected to come close to last year’s results, only seeing EPS drop by a penny. The other four stocks are expected to see earnings decline between 41% and 97%.

If we break the companies down in to which ones are holding up the best, they seem to be the ones that have a strong online presence. Walmart has seen online sales grow in the last few years and it helps that they also have superstores that offer groceries. Home Depot and Lowes both have successfully boosted online sales in the last few years and the home improvement retailers are likely seeing a boost from people being at home, working on home projects, gardening, etc. The lone exception to this theme is Target. Target is expected to post a pretty significant drop in its EPS, but the company has been successfully shifting to more online sales and it also has the benefit of superstores that offer groceries.

If we look at the stores that are expected to perform the worst, they are anchor-style stores. Nordstrom and Dullards are typical anchor stores in traditional malls while Kohl’s, T.J. Maxx, and Ross are frequently anchors in strip malls.

The only one I haven’t mentioned yet is Best Buy (NYSE: BBY). The electronics retailer is in a tough industry right now. The company has a strong online presence, but it is competing with online specialists like Amazon. With people stuck at home, you might think Best Buy would be seeing a boost in some product lines like games and computers, but apparently that hasn’t been enough based on the expected drop in EPS of 41%.

As a whole, I am skeptical of the retail sector for the long term. It is possible that we will see the stocks perform well after their earnings reports simply because the expectations are so bad. From a contrarian perspective, when the expectations are so low, the slightest positive news can help boost the stock’s price over the short term. We saw a similar development in energy stocks when they were in the spotlight.

I would suggest exercising caution when it comes to the retail sector as a whole, but there are a few companies that should perform well over the next couple of years. A lot of the statistics that are marked in green in the table above will likely change to lower readings once the earnings are announced.

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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