Where Did U.S. Consumers Shop In The First Quarter?

by: Lipper Alpha Insight

By Jharonne Martis

U.S. retailers have been reporting negative earnings lately, and the Commerce Department recently reported a 0.3% drop in May vs. expectations of a 0.3% increase. Which begs the question, where are shoppers spending their money?

To see who is benefiting from consumer spending, we looked at the highest performers in terms of Q1 2017 earnings growth rates (Exhibit 1). Not surprisingly, the internet & catalog retail sector posted the strongest earnings growth rate at 33.8%. When looking at the individual winners in terms of earnings, it’s clear that the bulk of positive earnings (about 25%) come from the household related retailers, including household appliances, homebuilding, home furnishing, household products, home improvement and housewares retailers. These categories were followed by restaurants (13%) and specialty retailers (8%).

Exhibit 1: Strongest Q1 2017 Earnings Growth Rates

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

Healthy eating trend

The results further tell us that when consumers left their households they were eating out and trying to stay healthy. Chipotle Mexican Grill (CMG) reported the strongest earnings growth rate among the restaurants. Its StarMine ARM Model score of 83 suggests analysts polled by Thomson Reuters are becoming bullish on the restaurant. Similarly, Nutrisystem (NTRI), the weight management company, posted an impressive 177.8% earnings growth rate. Its robust StarMine ARM Score of 98 also signifies bullish analysts’ sentiment.

Another retailer benefiting from the health trend is sporting goods retailer Big 5 Sporting Goods (BGFV). Royal Caribbean Cruises (RCL) also posted healthy growth rates. Beauty products retailers were also on top of consumers’ preferences: Coty (COTY), Inter Parfums (IPAR) and Ulta (ULTA) all posted robust earnings growth rates (Exhibit 2).

Exhibit 2: Other Positive Earnings Growth Rates: Q1 2017

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

Footwear walking strong

Meanwhile, when it came to apparel, shoes were a priority on consumer’s shopping lists, as the footwear group saw the strongest results. Crocs (CROX) had the strongest earnings growth rate. When buying clothes, consumers were doing so for their children first. The Children’s Place (PLCE) has the strongest earnings growth rate among apparel stores at 47.7%. Parents also bought toys for their children: Hasbro (HAS) is the winner in the leisure products group with a 42.1% earnings growth rate.

Other winners in the apparel group include retailer Gap (GPS), which received a boost from its Old Navy division, followed by Ross Stores (ROST) and underwear maker Haines Brands. Big Lots (BIG) has the strongest earnings growth rate among general merchandise stores, underlining the importance of value for consumers. Finally, Best Buy (BBY) had a nice comeback among the computer and electronic sector, posting a 36.4% earnings growth rate and 1.6% same-store sales (SSS).

The slackers

On the flip side, leisure products posted the weakest earnings growth rate at -33.5%. Individually, 21% of the constituents in our index that posted negative earnings growth rates came from the apparel retailers (Exhibit 2). Other weak results came from SuperValue and restaurant names including Biglari (BH), Fiesta Restaurant (FRGI) and Yum! Brands (YUM).

Exhibit 3: Weakest Q1 2017 Earnings Growth Rates

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

Q2 guidance

Retailers are already warning us not to expect much in the next reporting cycle. We continue to receive more negative guidance. For Q2 2017, there have been 53 negative EPS pre-announcements issued compared to only 19 positive EPS pre-announcements. This is almost four times the amount of negative guidance from the beginning of the month. The bulk of the negative guidance (43%) comes from the apparel sector. On the flip side, revenue pre-announcements have been less negative (Exhibit 4).

Exhibit 4: Q2 2017 Earnings and Revenue Guidance

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

Q1 estimates and revisions

About 99% of companies in our Thomson Reuters Retail/Restaurant Index have reported Q1 2017 EPS. And so far, first quarter earnings are expected to increase 6.0% from Q1 2016. Of the 220 companies in the Retail/Restaurant Index that have reported earnings to date for Q1 2017, 66% have reported earnings above analyst expectations, 9% matched, while 25% reported revenue below analyst expectations.

The Q1 2017 blended revenue growth estimate is 4.2%. About 57% have reported revenue above analyst expectations, and 43% reported revenue below analyst expectations.

Same-Store Sales

Of the 77 retailers that have reported Q1 same-store sales, 42% exceeded estimates, while 58% missed.

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

Restaurant Same-Store Sales:

Of the 39 restaurants that have reported 1Q Same-store sales, 64% exceeded estimates, while 36% missed.

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