U.S. Retailers And Restaurants Cautious About Q4 Earnings

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Includes: BITE, CNDF, FDIS, FTXD, FXD, JHMC, MENU, PMR, RCD, RETL, RTH, VCR, XLY, XRT
by: Lipper Alpha Insight

By Jharonne Martis

A number of retailers, including Macy’s (NYSE:M), Target (NYSE:TGT) and Tiffany (NYSE:TIF) recently reported weaker-than-expected holiday sales. The season began with solid sales on Black Friday (the day after Thanksgiving) but then slowed going into Christmas. As a result, retailers including Target lowered their full-year earnings guidance.

What’s behind the slow pace?

Fierce online competition has disrupted the traditional brick and mortar retail business and the food industry. As a result, there’s been food deflation, and the CPI food index continues to decline for eight straight months.

What’s more, mall traffic was slow and the consumer is value conscious. The strong dollar is also causing weak tourist traffic and spending.

Guidance

Retailers are getting ready to report Q4 2016 earnings, but are already warning us not to expect much good news. Negative guidance came from 65 companies, while only 18 companies have issued positive EPS guidance (Exhibit 1). The bulk of the negative guidance (31%) comes from the apparel sector.

Exhibit 1. Q4 2016 Earnings and Revenue Guidance

Source: Thomson Reuters I/B/E/S estimates

Outlook and trends

Fourth-quarter retail earnings are expected to grow 5.2% over Q4 2015. The Internet & Catalog retail, Household Durables and Hotels, Restaurants & Leisure sectors expect the highest earnings growth rates for the quarter, while the Food & Staples Retailing, and Leisure Products sectors have the negative anticipated growth rates compared to Q4 2015 (Exhibit 2).

The Internet & Catalog retail is expected to see earnings grow by 23.9%. The strength is being led by Expedia’s 78.1% estimated earnings growth rate, followed by Amazon’s strong 54.0% earnings results.

The Household Durables sector is expected to see earnings grow by 12.6%. The strength in this sector is driven by the homebuilders. Thus, the strength in the housing market is benefiting the homebuilders, including MDC Holdings Inc. with a 78.0% earnings result. Similarly, the Hotels, Restaurants & Leisure sector is expected to increase earnings by 11.8%. The sector is receiving a boost from Belmond Ltd. 100.0% estimated growth rate.

On the flip side, the Leisure Products sector has the weakest earnings growth rate at -10%. The weakness is coming from Mattel Inc. (NASDAQ:MAT) at -17.5% and Polaris Industries Inc. (NYSE:PII) at -28.9% estimated earnings growth rates. Similarly, the Food & Staples Retailing sector has a weak earnings growth rate at -1.6%. Weak earnings results at Supervalu, Inc. (NYSE:SVU) (-68.8%) and Sprouts Farmers Markets Inc. (NASDAQ:SFM) (-29.5%) are bringing the group down.

Exhibit 2. Q4 2016 Earnings Growth: Retail Industries


Source: Thomson Reuters I/B/E/S estimates

Earnings Growth Winners

Of the 160 companies in the Thomson Reuters Retail and Restaurant group that have yet to report Q4 2016 earnings, The Andersons Inc. (NASDAQ:ANDE) and Belmond (NYSE:BEL) are on top with 240.1%, and 100.0% estimated earnings growth rates, respectively. However, The Andersons Inc. announced that it will be closing its retail stores after a few years of weak financial performance.

It’s evident from the list of other winners that travel-related companies, including hotels and trip planner site Expedia (NASDAQ:EXPE), are still profiting from the experiences trend. (Consumers continue to prefer experiences over things, including traveling.)

Exhibit 3. Thomson Reuters Strongest Earnings Growth Rate Results: Q4 2016

Source: Thomson Reuters I/B/E/S estimates

Losers

Ascena Retail Group Inc. (NASDAQ:ASNA) and Fred’s (NASDAQ:FRED) are on track to post the weakest earnings growth rates at -1036.4% and -278.6%, respectively. The companies below are also hurting from company-specific issues versus sector-wide related difficulty.

Exhibit 4. Thomson Reuters Weakest Earnings Growth Rate Results: Q4 2016

Source: Thomson Reuters I/B/E/S estimates

Same Store Sales outlook

We expect a weak 0.4% SSS growth in Q4 2016 (vs. 1.2% in Q4 2015), suggesting that holiday sales were slower than a year ago.

Exhibit 5. Thomson Reuters Same Store Sales Index Q4 2016 EST VS. Q4 2015

Source: Thomson Reuters I/B/E/S estimates

Cosmetics and handbags

Other names to look out for are Ulta Salon Cosmetics (NASDAQ:ULTA), Children’s Place (NASDAQ:PLCE), Kate Spade (NYSE:KATE) and Lululemon (NASDAQ:LULU) (Exhibit 5). Ulta Salon Cosmetics has been enjoying stronger sales and margins. As a result, the retailer is expected to register the strongest SSS for Q4 at 13.7%, followed by Children’s Place at 6.1% SSS. Likewise, Kate Spade is still the strongest in the handbag accessories group and is also expected to post a 6.1% SSS, on top of a difficult comparison last year of 14.0% SSS.

Exhibit 6. Thomson Reuters Same Store Sales – Top Estimates Q4 2016

Source: Thomson Reuters I/B/E/S estimates

Retail SSS Losers

On the flip side, the department stores continue to hurt. Sears (NASDAQ:SHLD), Stage Stores (NYSE:SSI), Dillard’s (NYSE:DDS), Kohl’s (NYSE:KSS) and Macy's are all expected to see a drop in SSS. The Buckle was facing an easy comparison from a year ago (-7.2% SSS), and already reported the weakest result, at -16.1% SSS. Meanwhile, GameStop (NYSE:GME) has the weakest SSS estimate at -16.9% as the gaming industry continues to be disrupted by online business.

Exhibit 7. Thomson Reuters Same Store Sales – Bottom Estimates Q4 2016

Source: Thomson Reuters I/B/E/S estimates

Restaurant SSS Index

We expect a weak 1.1% SSS growth in Q4 2016 (vs. 3.7% in Q4 2015), suggesting that restaurant holiday sales were also slower than a year ago.

Exhibit 8. Thomson Reuters Restaurant Same Store Sales Sectors Q4 2016

Source: Thomson Reuters I/B/E/S estimates

Restaurant SSS Winners

Football season is helping comparative sales at Domino’s Pizza (NYSE:DPZ) and Papa John’s International, Inc. (NASDAQ:PZZA). These restaurants are enjoying the strongest SSS estimates at 10.1%, and 6.5%, respectively. Analysts polled by Thomson Reuters are also optimistic on the restaurants’ value proposition. Meanwhile, Starbucks (NASDAQ:SBUX) already reported a robust 3.0% SSS, vs. last year’s difficult 9.0% SSS comparison. Looking forward, Starbucks’ earnings growth estimates suggest healthy performance.

Exhibit 9. Thomson Reuters Restaurant Same Store Sales – Top Estimates Q4 2016

Source: Thomson Reuters I/B/E/S estimates

Restaurant SSS Losers

On the flip side, Chipotle Mexican Grill, Inc. (NYSE:CMG) already reported the weakest SSS result at -4.8%, below its -4.7% final estimate. However, the restaurant has introduced new menu items and restructured their strategy to better compete digitally. Other restaurants, including Red Robin Gourmet Burgers (NASDAQ:RRGB), have also been hurt by the discount environment and Red Robin is expected to post a -3.9% SSS.

Exhibit 10. Thomson Reuters Restaurant Same Store Sales – Bottom Estimates Q4 2016

Source: Thomson Reuters I/B/E/S estimates

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