Seeking Alpha
Long/short equity, research analyst, portfolio strategy, newsletter provider
Profile| Send Message|
( followers)  

By Brian Sozzi

Those who were bracing for doom and gloom from 2Q earnings reports by retailers thus far have to be pleasantly surprised. Across the broad spectrum of retailers I compiled data on, from footwear to furniture, revenue, gross margin, operating income, and earnings per share are soundly beating consensus forecasts following a worrying start to the year.

Data Rundown (13 companies)

  • 69% have beaten revenue estimates. Average upside of 1.5% compares with average miss of 1.6% in 1Q.
  • 69% have beaten gross margin estimates. Average upside of 3.1% compares with average beat of 0.45% in 1Q.
  • 69% have beaten on operating income estimates. Average upside of 3.68% compares with average miss of 6.2% in 1Q.
  • 61% have beaten on earnings per share estimates. Average upside of 3.15% compares with average beat of 14.3% in 1Q.

Now, there a couple of ways to interpret the data. Let's begin with the positive. In spite of dreary readings on the jobs market and a softening in the government's monthly retail sales numbers, retailers have managed to expand their top lines by:

  1. price increases with no material harmful impact to volume;
  2. international, with surprising resilience from Europe; and
  3. e-commerce momentum. Reviewing the best in breed reports from the most recent quarter from the likes of Nike (NKE), Wolverine Worldwide (WWW), Under Armour (UA), Apple (AAPL), and Tempur Pedic (TPX), they contain all of these positive attributes or at least one that makes up for limitations elsewhere (Tempur Pedic not a big player internationally, but sells a premium priced product to a receptive high-end U.S. consumer). Additionally, expenses continue to be tightly managed, compounding the success further up the income statement.

On the Debbie Downer side of things, how truly good are these beats seeing as analysts slashed their estimates aggressively after dour 1Q earnings calls? There was panic in the air in 1Q, so analysts built in worst-case scenarios and then hoped for upside from that point forward. When all is said and done, it's obvious when retail companies are barely hurdling over lowered Wall Street estimates there are pockets of stress in consumer land, and as a result, valuations on the stocks are held back out of fear of future risk to estimates.

All in, pleasant start to the reporting season for the sector, but I continue to urge investors to wear the stock picker's cap. The data also fleshed out, unsurprisingly, that any retailer whose fortunes are leveraged to middle to low income households will have a rough go fundamentally and with matching reduced expectations by the Street.

Winning Reports

* NKE, WWW, UA, AAPL, VFC, TPX

Losing Reports

* The Jones Group (JNY), Lumber Liquidators (LL), Office Depot (ODP), Stanley Furniture (STLY), LaCrosse Footwear (BOOT), Aeron's (AAN) and Radio Shack (RSH).

Profound Management Statement: Carter's Inc. (CRI)

"As expected, earnings have been affected by higher cotton prices, but our outlook for product costs is improving."

Source: The Encrypted Messages Behind Early Retail Earnings