No Shortage Of Positive Retail Sector Surprises

Wal-Mart’s positive earnings report offers reassurance to those in the market that see the company’s hybrid physical store and ecommerce model as a differentiator in the broader space. This has improved the odds that Wal-Mart (WMT) will be better able to compete in the emerging retail landscape following Amazon’s (AMZN) Whole Foods purchase. Sales in the company’s ecommerce business, in which it has been actively investing lately, were up +70% from the year-earlier period and contributed nicely to the +1.7% comp growth, the 12th quarter in a row of positive same-store sales growth.

The stock’s tepid reaction to the Q2 earnings results appears more a function of the run up this year than any weakness in the report. The stock is up +15.4% in the year-to-date period, outperforming the Zacks Retail sector (up +14.3%) and the S&P 500 index (+8.7%). As such, the positives were already priced in the stock, giving market participants a sell-the-news type of opportunity. This angle explains the market’s favorable reaction to the Target (TGT) results, which has been a laggard lately, with the stock down -22.4% in the year-to-date period.

Including all of these reports, we now have Q2 results from 31 of the 40 retailers in the S&P 500 index. This week brings results from Lowe’s (LOW), Tiffany (TIF), Dollar Tree (NASDAQ:DLTR) (DLTR) and others. Total earnings for the 31 retailers that have reported already are down -0.8% from the same period last year on +4.8% higher revenues, with 77.4% beating EPS estimates and 80.6% beating revenue estimates.

Please note that we have a stand-alone Retail sector, unlike the official Standard & Poor’s placement of this space in the Consumer Discretionary sector. The Zacks Retail sector includes, besides the traditional department stores and other brick-and-mortar retailers, the online vendors like Amazon and Priceline and restaurant operators. Results from the online vendors and most of the restaurant operators typically come out in the first phase of each reporting cycle.

The side-by-side charts below compare the sector’s results thus far with what we have seen from the same group of 31 retailers in other recent periods.

The aggregate growth pace from the 31 retailers that have reported results already are tracking below what we had seen from the same companies in other recent periods. A big contributor to the weak earnings growth showing this quarter is the -77% drop in Amazon’s earnings on +24.8% higher revenues. Excluding the Amazon drag, Q2 earnings for the sector would be up +3.1% on +3% higher revenues. This ex-Amazon growth picture compares relatively favorably with historical periods, as the chart below shows.

Unlike growth, positive surprises are as numerous in this sector as they have been in other sectors this earnings season. In fact, the proportion of retailers beating revenue estimates is the third highest of all 16 Zacks sectors in Q2 at 80.6%, behind only the Conglomerates (83.3%) Technology (85.2%) sectors.

Q2 Earnings Season Scorecard (as of Friday, August 18, 2017)

The Q2 earnings season has come to an end for 11 of the 16 Zacks sectors, with results from 474 S&P 500 members or 94.8% of the index’s total membership already out. Total earnings for these companies are up +10.6% from the same period last year on +5.6% higher revenues, with 74.9% beating EPS estimates and 68.4% beating revenue estimates.

The table below shows the current Q2 Scorecard

The charts below compare the Q2 results thus far from the 474 index members with what we had seen from the same group of companies in other recent periods.

As pointed out earlier, the proportion of companies beating revenue estimates is tracking above historical periods (right-hand chart). The earnings and revenue growth pace for these 474 companies is below what we had seen from the same sample of companies in Q1, but an improvement over other recent periods.

Here are the four takeaways from the Q2 earnings season.

First, the earnings and revenue growth pace has steadily gone up relative to pre-season expectations. Total Q2 earnings for the index are currently expected to be up +10.3% from the same period last year on +5.4% higher revenues.

Please note that the +10.3% growth rate is the blended growth rate; it combines the actual growth for the 474 S&P 500 members that have reported with estimates for the still-to-come 26 index members. At the start of the quarter, the expectation was for earnings growth of +7.9%, which came down as the quarter unfolded, reaching as low as +5.6% just ahead of the start of the reporting season.

The deceleration in Q2 earnings growth notwithstanding, the quarter’s earnings tally is on track to reach a new all-time quarterly record, surpassing the 2016 Q4 level, as you can see in the chart below. The chart below contrasts the estimated 2017 Q2 total of $294.3 billion with the actual earnings for the preceding four quarters and estimates for the following four periods.

This record isn’t expected to last very long, with each of the coming quarters expected to bring in ever bigger earnings tallies.

Second, an above-average proportion of companies are beating estimates, particularly revenue estimates. We typically don’t give this factor a lot of weight in evaluating or assessing an earnings season since we all know that management teams are experts in managing expectations. Even then, the trend emerging in the Q2 earnings season is noteworthy for two reasons. First, estimates for the quarter had not fallen by as much as had historically been the case. Second, the proportion of positive revenue surprises, a much harder variable to manipulate relative to earnings, is really off the chart.

Third, Q2 growth is broad-based and not dependent on one or two sectors. There is strong growth contribution from the Finance, Technology and Energy sectors in Q2, but we have 13 of the 16 Zacks sectors on track to produce more earnings than the year-earlier period.

Fourth, estimates for the September quarter have started coming down, but the pace and magnitude of negative revisions compares favorably to other comparable periods. Total Q3 earnings are currently expected to be up +4.0% from the same period last year, down from +6.3% at the start of July. The chart below shows the evolution of Q3 growth expectations since the start of the period.

This is a reassuring start on the revisions front, but we will have to see if this trend will remain in place through the rest of this earnings season.

The chart below shows Q2 earnings growth expectations contrasted with what is expected in the following three quarters and actual results in the preceding 5 quarters. As you can see in the chart below, this growth pace is expected to continue through the rest of the year.

Note: Sheraz Mian manages the Zacks equity research department. He is an acknowledged earnings expert whose commentaries and analyses appear on Zacks.com and in the print and electronic media. His weekly earnings related articles include Earnings Trends and Earnings Preview. He manages the Zacks Top 10 and Focus List portfolios and writes the Weekly Market Analysis article for Zacks Premium subscribers.

More Stock News: Tech Opportunity Worth $386 Billion in 2017

From driverless cars to artificial intelligence, we've seen an unsurpassed growth of high-tech products in recent months. Yesterday's science-fiction is becoming today's reality. Despite all the innovation, there is a single component no tech company can survive without. Demand for this critical device will reach $387 billion this year alone, and it's likely to grow even faster in the future.

Zacks has released a brand-new Special Report to help you take advantage of this exciting investment opportunity. Most importantly, it reveals 4 stocks with massive profit potential. See these stocks now>>

Here is a list of the 89 companies including 17 S&P 500 members reporting this week.