Earnings Update: Looking Ahead At This Week's U.S. Retail Results

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by: Lipper Alpha Insight

By Jharonne Martis

About 70% of retailers and restaurants have already reported Q3 earnings. What's in store for retailers this week? A 3.0% Same Store Sales (SSS) gain reflects healthy consumer spending, and a few retailers are poised to post healthy comps this week, including Home Depot (NYSE:HD), Best Buy (NYSE:BBY), and Williams-Sonoma (NYSE:WSM). On the flip side, Foot Locker (NYSE:FL) is expected to post the weakest SSS estimate this week at -4.2%.

Exhibit 1: SSS and Earnings for Retailers Reporting Week of November 13, 2017

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

Strongest estimates

The robust housing market continues to benefit Home Depot which is on track to post the strongest SSS estimate this week at 5.8%. This is also above last year's 5.5% SSS result and on track for a 13.7% jump in earnings. Now that consumers have invested in fixing their homes, they are also hoping to improve the stay-at-home experience. As a result, Williams-Sonoma is expected to post a 3.0% SSS, and 6.2% growth in earnings. Meanwhile, analysts polled by Thomson Reuters are bullish on Best Buy, following the positive earnings results from tech companies Apple (NASDAQ:AAPL) and Samsung (OTC:SSNLF). Best Buy is on track to post a robust 5.0% SSS, above last year's 1.8% result.

On the flip side, analysts polled by Thomson Reuters are bearish on Foot Locker, Inc. The retailer is facing difficult comparisons from last year. As a result, earnings are expected to drop 29% vs. last year.

Wal-Mart (NYSE:WMT)

Analysts polled by Thomson Reuters are becoming more bullish on this retailer, which continues to experience improvement in its in-store traffic, while competing with Amazon (NASDAQ:AMZN). Over the past month, analysts have been raising earnings estimates for Wal-Mart. It's on track to post 13 consecutive quarters of positive same-store sales, and Thomson Reuters StarMine Earnings Quality model tells us that Wal-Mart's earnings are coming from sustainable sources.

However, Wal-Mart has a $0.97 EPS estimate, slightly below last year's result. In a changing retail landscape, where shoppers gravitate towards online shopping, it will be interesting to see if Wal-Mart reduces, or maintains its vast retail footprint. What's more, its e-commerce has grown consistently, especially since the Jet.com acquisition (Exhibit 2). It's allowed Wal-Mart to tap into a bigger and younger audience. Jet.com is more popular among millennials, who make up the biggest proportion of consumers.

Exhibit 2: Wal-Mart E-commerce Growth

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

Target

Target's (NYSE:TGT) second quarter earnings are expected to fall -18.1% from a year ago to $0.85/share. However, the retailer is facing easy SSS comparisons vs. last year. As a result, Same Store Sales are expected to come in stronger at 0.4%, above last year's -0.2%. Analysts polled by Thomson Reuters also are bullish on this retailer and have been raising their Q3 earnings estimates. Target's e-commerce saw healthy gains last quarter, and it will be interesting to see if the division and its merchandise selection remain competitive in this retail climate.

Exhibit 3: Target Earnings Growth Rates

Source: Thomson Reuters Eikon

Gap

Gap (NYSE:GPS) is facing easy comparisons vs. last year. As a result, it is on track to post a 1.1% SSS growth, on top of last year's -3.0% SSS result. Its Banana Republic division is the only group on track to post a negative SSS at -3.9%, above last year's -8.0% comp. Gap's earnings are expected to fall 9.6% compared to Q3 2016. Still, its Old Navy division is on track to post a healthy 2.5% SSS. StarMine Earnings Quality model tells us that the retailer's earnings are coming from sustainable sources, as good cash flow and operating efficiency.

Exhibit 4: Gap's Q3 2017 Same Store Sales Estimates


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

However, analysts polled by Thomson Reuters remain cautious about Old Navy's future performance, as the retailer is and will be facing more difficult SSS comparisons.

Exhibit 5: Old Navy's Same Store Sales Results and Estimate

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