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Breaking Down Retail Earnings and Consumer Spending Trends
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It is no surprise that the combined weight of elevated inflation, rising interest rates and uncertainty about the economy have forced consumers to change their spending behavior.
The issue has undoubtedly been at play with lower-income households for some time now. But we can intuitively appreciate that it will not stay restricted to this consumer segment alone and will most likely move up the income chain in the days ahead.
We saw some of that in the Walmart ((WMT - Free Report) ) report that showed the retailer benefiting from higher-income consumers ‘trading down’ to its stores in response to the aforementioned headwinds. On the flip side, a big contributor to Walmart’s weak guidance for this year reflects a moderating consumer spending backdrop that some in the market see as overly conservative.
The retail business is a tough and competitive space even in ‘normal’ times and these are anything but normal times.
They need just the right amount of inventory, otherwise they will either lose sales if they don’t have enough merchandise as was the case earlier in the pandemic or they will need to offer steeper discounts and hurt margins if they have too much of it, as we saw with Walmart and Target ((TGT - Free Report) ) last year.
Retailers also need to make sure that they have the right type of merchandise, as we saw with Target and Walmart having too much of the patio furniture that consumers weren’t interested in buying. Keeping stores fully staffed in a tight labor market and ensuring just right amount of price discounts are some of the other challenges that big-box operators like Walmart, Target and others face daily.
Walmart’s strong performance on the inventory front over the last two quarters is a big reason why the stock has done so much better relative to Target whose results are coming out before the market’s open on Tuesday, February 28th.
Target shares are one of those stocks that really move on quarterly releases. The stock was down following each of the last three releases, with the May 18th 2022 report was one for the record books when the stock lost more than a quarter of its value as the company’s inventory and merchandising problems took center stage. This puts a premium on Target’s release Tuesday morning given the stock’s impressive run this year.
It all comes down to execution and management effectiveness.
In a backdrop of moderating and shifting consumer spending behavior, some retailers have been more successful than others. Walmart has been better, Target less so, though Target shares have been stellar performers in recent weeks. Macy’s ((M - Free Report) ), which also reports this week, has been one of the laggards.
You can see some of this in one-year performance of Walmart (orange line, up +3.3%), Target (blue line, down -17.6%), Macy’s (green line, down -22.5%) shares relative to the S&P 500 index (red line, down -10.1%).
Image Source: Zacks Investment Research
Since the start of 2023, however, Target shares are up +10.1% vs. +4.5% for the S&P 500 index, while Walmart and Macy’s shares are down -0.6% and -1%, respectively.
With respect to the Retail sector’s 2022 Q4 earnings season scorecard, we now have results from 24 of the 33 retailers in the S&P 500 index. Total Q4 earnings for these retailers are down -33% from the same period last year on +6.5% higher revenues, with 70.8% beating EPS estimates and 62.5% beating revenue estimates.
The comparison charts below put the Q4 beats percentages for these retailers in a historical context.
Image Source: Zacks Investment Research
As you can see above, retailers have been struggling to come out with positive surprises thus far, with the variance relative to the historical ranges particularly notable on the EPS side.
With respect to the earnings and revenue growth rates, Amazon’s -85.4% earnings decline plays a significant role in the group’s weak year-over-year growth rate for the sector (Amazon is part of the Zacks Retail sector, and not the Zacks Technology sector). Most of the Retail sector earnings reports that have come out already are in the digital part of the space, with the more traditional retailers started the reporting cycle with last week’s Walmart release and a host of others on deck this week.
As we all know, the digital and brick-and-mortar operators have been converging for some time now, with Amazon now a decent sized brick-and-mortar operator after Whole Foods and Walmart a growing online vendor. This long-standing trend got a huge boost from the Covid lockdowns.
The two comparison charts below show the Q4 earnings and revenue growth relative to other recent periods, both with Amazon’s results (left side chart) and without Amazon’s numbers (right side chart).
Image Source: Zacks Investment Research
This Week’s Reporting Docket
We have more than 550 companies on deck to report results this week, including 30 S&P 500 members. Notable companies reporting this week, aside from the aforementioned retailers include Berkshire Hathaway, Broadcom, Salesforce.com, and others.
2022 Q4 Earnings Season Scorecard
As of Friday, February 24th, we now have Q4 results from 468 S&P 500 members or 93.6% of the index’s total membership. Total earnings for these companies are down -5.7% from the same period last year on +6% higher revenues, with 70.7% beating EPS estimates and an equal proportion beating revenue estimates.
The comparison charts below put the EPS and revenue beats percentages in Q4 in a historical context.
Image Source: Zacks Investment Research
The comparison charts below put the earnings and revenue growth rates in Q4 in a historical context.
Image Source: Zacks Investment Research
As you can see, there is a notable deceleration in the growth trajectory, both for earnings as well as revenues. Please note that this decelerating growth trend doesn’t change in any meaningful way whether we look at it on an ex-Finance or ex-Tech bases.
The Earnings Big Picture
We have all along been referring to the overall picture that emerged from the 2022 Q4 reporting cycle as good enough; not great, but not bad either.
The revisions trend continues to be negative, with the outlook for a number of sectors on the weak side. But it is consistent with the evolving macroeconomic picture and far from the dire scenario that many in the market feared. You can see this in the chart below that shows how estimates for the current period (2023 Q1) have evolved in recent weeks.
Image Source: Zacks Investment Research
Please note that while Q1 estimates are coming down, the pace and magnitude of cuts is notably below what we had seen ahead of the start of the last couple of earnings seasons.
The chart below shows the aggregate earnings total for the index since the start of last year.
Image Source: Zacks Investment Research
Please note that the $1.911 trillion in expected aggregate earnings for the index in 2023 approximate to an index ‘EPS’ of $215.47, down from $215.89 last week and the $215.90 tally we are on track to have seen in 2022.
The chart below shows this 2023 index ‘EPS’ estimate has evolved since the start of 2022.
Image Source: Zacks Investment Research
With the bulk of the 2022 Q4 reporting cycle now behind us, revisions have mostly played down for the next few weeks though the Retail sector results will have a bearing on how expectations for that space evolve.
We continue to believe that a definitive read on the revisions front will only emerge once we have seen an end to the Fed’s tightening cycle and the impact of the cumulative tightening on economic growth.
That said, relative to pre-season doom-and-gloom worries, this is fairly reassuring outcome.
The chart below shows the expected 2022 Q4 earnings and revenue growth expectation in the context of where growth has been in recent quarters and what is expected in the next few quarters.
Image Source: Zacks Investment Research
The chart below shows the overall earnings picture on an annual basis.
Image Source: Zacks Investment Research
As you can see here, estimates for 2023 are now a hair below the 2022 level. For more details about the evolving earnings picture, please check out our weekly Earnings Trends report here >>>>Exploring the Retail Sector and Looking Ahead to 2023 Earnings
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Breaking Down Retail Earnings and Consumer Spending Trends
It is no surprise that the combined weight of elevated inflation, rising interest rates and uncertainty about the economy have forced consumers to change their spending behavior.
The issue has undoubtedly been at play with lower-income households for some time now. But we can intuitively appreciate that it will not stay restricted to this consumer segment alone and will most likely move up the income chain in the days ahead.
We saw some of that in the Walmart ((WMT - Free Report) ) report that showed the retailer benefiting from higher-income consumers ‘trading down’ to its stores in response to the aforementioned headwinds. On the flip side, a big contributor to Walmart’s weak guidance for this year reflects a moderating consumer spending backdrop that some in the market see as overly conservative.
The retail business is a tough and competitive space even in ‘normal’ times and these are anything but normal times.
They need just the right amount of inventory, otherwise they will either lose sales if they don’t have enough merchandise as was the case earlier in the pandemic or they will need to offer steeper discounts and hurt margins if they have too much of it, as we saw with Walmart and Target ((TGT - Free Report) ) last year.
Retailers also need to make sure that they have the right type of merchandise, as we saw with Target and Walmart having too much of the patio furniture that consumers weren’t interested in buying. Keeping stores fully staffed in a tight labor market and ensuring just right amount of price discounts are some of the other challenges that big-box operators like Walmart, Target and others face daily.
Walmart’s strong performance on the inventory front over the last two quarters is a big reason why the stock has done so much better relative to Target whose results are coming out before the market’s open on Tuesday, February 28th.
Target shares are one of those stocks that really move on quarterly releases. The stock was down following each of the last three releases, with the May 18th 2022 report was one for the record books when the stock lost more than a quarter of its value as the company’s inventory and merchandising problems took center stage. This puts a premium on Target’s release Tuesday morning given the stock’s impressive run this year.
It all comes down to execution and management effectiveness.
In a backdrop of moderating and shifting consumer spending behavior, some retailers have been more successful than others. Walmart has been better, Target less so, though Target shares have been stellar performers in recent weeks. Macy’s ((M - Free Report) ), which also reports this week, has been one of the laggards.
You can see some of this in one-year performance of Walmart (orange line, up +3.3%), Target (blue line, down -17.6%), Macy’s (green line, down -22.5%) shares relative to the S&P 500 index (red line, down -10.1%).
Image Source: Zacks Investment Research
Since the start of 2023, however, Target shares are up +10.1% vs. +4.5% for the S&P 500 index, while Walmart and Macy’s shares are down -0.6% and -1%, respectively.
With respect to the Retail sector’s 2022 Q4 earnings season scorecard, we now have results from 24 of the 33 retailers in the S&P 500 index. Total Q4 earnings for these retailers are down -33% from the same period last year on +6.5% higher revenues, with 70.8% beating EPS estimates and 62.5% beating revenue estimates.
The comparison charts below put the Q4 beats percentages for these retailers in a historical context.
Image Source: Zacks Investment Research
As you can see above, retailers have been struggling to come out with positive surprises thus far, with the variance relative to the historical ranges particularly notable on the EPS side.
With respect to the earnings and revenue growth rates, Amazon’s -85.4% earnings decline plays a significant role in the group’s weak year-over-year growth rate for the sector (Amazon is part of the Zacks Retail sector, and not the Zacks Technology sector). Most of the Retail sector earnings reports that have come out already are in the digital part of the space, with the more traditional retailers started the reporting cycle with last week’s Walmart release and a host of others on deck this week.
As we all know, the digital and brick-and-mortar operators have been converging for some time now, with Amazon now a decent sized brick-and-mortar operator after Whole Foods and Walmart a growing online vendor. This long-standing trend got a huge boost from the Covid lockdowns.
The two comparison charts below show the Q4 earnings and revenue growth relative to other recent periods, both with Amazon’s results (left side chart) and without Amazon’s numbers (right side chart).
Image Source: Zacks Investment Research
This Week’s Reporting Docket
We have more than 550 companies on deck to report results this week, including 30 S&P 500 members. Notable companies reporting this week, aside from the aforementioned retailers include Berkshire Hathaway, Broadcom, Salesforce.com, and others.
2022 Q4 Earnings Season Scorecard
As of Friday, February 24th, we now have Q4 results from 468 S&P 500 members or 93.6% of the index’s total membership. Total earnings for these companies are down -5.7% from the same period last year on +6% higher revenues, with 70.7% beating EPS estimates and an equal proportion beating revenue estimates.
The comparison charts below put the EPS and revenue beats percentages in Q4 in a historical context.
Image Source: Zacks Investment Research
The comparison charts below put the earnings and revenue growth rates in Q4 in a historical context.
Image Source: Zacks Investment Research
As you can see, there is a notable deceleration in the growth trajectory, both for earnings as well as revenues. Please note that this decelerating growth trend doesn’t change in any meaningful way whether we look at it on an ex-Finance or ex-Tech bases.
The Earnings Big Picture
We have all along been referring to the overall picture that emerged from the 2022 Q4 reporting cycle as good enough; not great, but not bad either.
The revisions trend continues to be negative, with the outlook for a number of sectors on the weak side. But it is consistent with the evolving macroeconomic picture and far from the dire scenario that many in the market feared. You can see this in the chart below that shows how estimates for the current period (2023 Q1) have evolved in recent weeks.
Image Source: Zacks Investment Research
Please note that while Q1 estimates are coming down, the pace and magnitude of cuts is notably below what we had seen ahead of the start of the last couple of earnings seasons.
The chart below shows the aggregate earnings total for the index since the start of last year.
Image Source: Zacks Investment Research
Please note that the $1.911 trillion in expected aggregate earnings for the index in 2023 approximate to an index ‘EPS’ of $215.47, down from $215.89 last week and the $215.90 tally we are on track to have seen in 2022.
The chart below shows this 2023 index ‘EPS’ estimate has evolved since the start of 2022.
Image Source: Zacks Investment Research
With the bulk of the 2022 Q4 reporting cycle now behind us, revisions have mostly played down for the next few weeks though the Retail sector results will have a bearing on how expectations for that space evolve.
We continue to believe that a definitive read on the revisions front will only emerge once we have seen an end to the Fed’s tightening cycle and the impact of the cumulative tightening on economic growth.
That said, relative to pre-season doom-and-gloom worries, this is fairly reassuring outcome.
The chart below shows the expected 2022 Q4 earnings and revenue growth expectation in the context of where growth has been in recent quarters and what is expected in the next few quarters.
Image Source: Zacks Investment Research
The chart below shows the overall earnings picture on an annual basis.
Image Source: Zacks Investment Research
As you can see here, estimates for 2023 are now a hair below the 2022 level. For more details about the evolving earnings picture, please check out our weekly Earnings Trends report here >>>> Exploring the Retail Sector and Looking Ahead to 2023 Earnings