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Retail Stock Outlook: Is the Sector Reflecting Growth?
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Retailing involves buying large quantities of goods and selling them in smaller quantities to consumers for a profit. The health of the retail industry is an important economic indicator as it is linked directly to consumers and their propensity to spend. Consumer spending is the key to the well being of any economy as it accounts for more than two-thirds of economic activity.
The link between consumer spending and the retail industry becomes more relevant as retail sales attract approximately 30% of total consumer spending in the U.S. Also, the retail industry ranks among the top U.S. industries and employs an enormous workforce, contributing to the health of the job market.
Before jumping onto trends in retail, here’s a peek into key economic indicators, which suggest where the market is heading.
Recent data revealed that U.S. consumer spending rose for the second straight month in May, climbing 0.4% after a 1.1% gain in Apr 2016 that marked the strongest rise in seven years. This indicates that the U.S. economy picked up in these two months after a slow start in the first quarter of 2016. The report further suggested that income rose 0.2% in May, following a 0.5% increase in April.
However, there is a wave of fear pertaining to how American shoppers will react to Britain's decision to leave the European Union (the ‘Brexit’ vote). Analysts believe that there is a likeliness of consumer spending dropping further ahead as the outcome of Brexit becomes clear. Brexit has not only made global financial markets volatile, it has also created uncertainty over the prospects of the world economy.
Concurrently, a report by the Commerce Department suggests that the third estimate of real gross domestic product (GDP) expanded at an annual rate of 1.1% in the first quarter of 2016, above the second estimate of 0.8%. These reports collectively advocate that the U.S. economy is definitely showing resilience.
We note that the U.S. labor market looks quite stable, with unemployment rate for June making a comeback at 4.9% after falling to 4.7% in May. The report by the Bureau of Labor Statistics indicated that a total of 287,000 nonfarm payroll was added in June, of which retail employment increased 30,000.
Given a rebounding U.S. economy, the retail space is bubbling with optimism. This is evident from June’s 0.8% rise in retail sales, excluding automobiles, gasoline stations and restaurants, from May 2016 and a solid 5.1% increase over Jun 2015, as reported by the nation's largest retail trade group – National Retail Federation (NRF). The federation pointed out that solid growth in June was a follow up of the sales momentum in April and May.
Overall, retail sales is benefitting from a solid rebound in consumer spending as well as job gains and rising income levels. Further, the federation is of the view that this strength provides visibility into the future and expects this momentum to last in the second half of 2016.
Additionally, NRF had projected retail sales for 2016 to rise 3.1%, which is higher than the 10-year average sales growth of 2.7%. Online sales in 2016 are expected to increase in the band of 6–9%.
Market experts expect retail sales growth in 2016 to come on the back of improving wages, job creations as well as steady consumer confidence, which will negate the headwinds from an uncertain global environment.
Key Retail Metrics
The key data in the retail industry analysis is comparable-store sales (comps) as it excludes sales at newly opened and closed stores. We observe that sales data for the month of June, which is the last month of the second quarter, had a positive tone as most retailers’ posted better-than-expected comps.
The list of gainers in June was led by the clothing retail chain L Brands Inc. (LB - Free Report) that posted a comps gain of 6% and sales improvement of 5% to $4.7 billion. This was followed by the long distressed, teen retailer The Gap Inc. (GPS - Free Report) that reported a 2% increase in both comps and sales. This marked the company’s comeback after 14 consecutive declines in comps, all thanks to revival of its Old Navy brand.
Going down the line, warehouse retailer Costco Wholesale Corp. (COST - Free Report) posted flat comps in June, while total sales rose 3% to $11.33 billion. Comps came in flat but were ahead of analysts’ expectations.
On the other hand, the list of disappointers for the month was topped by The Buckle Inc. (BKE - Free Report) which witnessed a 10.6% decline in comps and a 10.1% fall in net sales to $78.3 million for June. It was followed by apparel and accessories retailer Cato Corp. (CATO - Free Report) that reported an 8% decline in comps while net sales slumped 6% to $88 million.
Further, Washington-based retailer of sports-related teen apparel Zumiez Inc. (ZUMZ - Free Report) reported a 4.5% decline in comps, with sales falling 0.6% to $66.6 million from the year-ago period. While this marked the company’s fifteenth consecutive comps decline, it marked an improvement from analysts’ expectations.
At the bottom of the list was discount store operator Fred's Inc. with a 1.3% fall in comps for June.Fred's net sales slipped 2.3% to $208.5 million.
Zacks Industry Rank
Within the Zacks Industry classification, Retail/Wholesale (one of 16 Zacks sectors) is divided into two categories -- Nonfood Retail-Wholesale and Food/Drug- Retail/Wholesale under the Medium (M) Industry Group and further sub-divided into 14 industries at the expanded (X) level -- Building Products-Retail/Wholesale, Internet Commerce, Retail/Wholesale Auto/Truck, Retail-Apparel/Shoe, Retail-Consumer Electronics, Retail-Discount, Retail-Drug Store, Retail-Jewelry, Retail-Miscellaneous/Diversified, Retail-Restaurants, Retail-RGN Department, Retail-Supermarket, Retail/Wholesale-Auto Parts and Retail/Wholesale CMP.
We divide the 16 Zacks sectors into 60 M-level industries and 250 X-level industry groups. We rank all the 250 plus industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. To learn more visit: About Zacks Industry Rank.
As a point of reference, the outlook for industries with a Zacks Industry Rank #88 and lower is 'Positive,' between #89 and #176 is 'Neutral' and #177 and higher is 'Negative.'
The Zacks Industry Rank is #33 for Retail/Wholesale CMP, #47 for Retail-Discount, #63 for Retail-Miscellaneous/Diversified, #84 for Internet Commerce, #93 for Retail-Consumer Electronics, #150 for Retail-Restaurants, #177 for Retail/Wholesale-Auto Parts, #185 for Retail-RGN Department, #213 for Building Products-Retail/Wholesale, #222 for Retail-Drug Store, #225 for Retail-Apparel/Shoe, #225 for Retail-Supermarket, #245 for Retail-Jewelry and #254 for Retail/Wholesale Auto/Truck.
On analyzing the Zacks Industry Rank for the constituent industries in this space, it is apparent that the overall outlook for the Retail/Wholesale sector is Negative.
Sector Level Earnings Trends
The Q2 earnings season has effectively started with results from 126 S&P 500 members, accounting for 32.7% of the index’s total market capitalization, already on the books as of Jul 22. Of the 16 Zacks sectors, Finance, Transportation, Construction, Consumer Staples, Basic Materials and Technology have considerably reported results so far.
For Q2 as a whole, combining the actual results from the 126 index members with estimates from the upcoming 374 companies, total earnings are expected to be down -3.4% from the same period last year on -0.5% lower revenues. The blended Q2 growth rate has improved as companies have come up with better-than-expected results. However, the quarter still on the track to be in the negative zone for the 5th consecutive time.
Coming to the retail sector, the earnings season is still to come in full force as only 27.3% of the total space has released Q2 results so far. Total Q2 earnings for the Retail sector in the S&P 500 are down 4.4% from the same period last year, on a 0.6% decline in revenues, with 33.3% beating EPS estimates and only 16.7% coming ahead of top-line expectations.
Combing results on the board and upcoming, Q2 forecasts show that earnings for the Retail sector are expected to drop 0.5%, whereas revenues are anticipated to increase 4.7%.
For more details on earnings of this sector and others, please read our ‘Earnings Trends’ report.
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Retail Stock Outlook: Is the Sector Reflecting Growth?
Retailing involves buying large quantities of goods and selling them in smaller quantities to consumers for a profit. The health of the retail industry is an important economic indicator as it is linked directly to consumers and their propensity to spend. Consumer spending is the key to the well being of any economy as it accounts for more than two-thirds of economic activity.
The link between consumer spending and the retail industry becomes more relevant as retail sales attract approximately 30% of total consumer spending in the U.S. Also, the retail industry ranks among the top U.S. industries and employs an enormous workforce, contributing to the health of the job market.
Before jumping onto trends in retail, here’s a peek into key economic indicators, which suggest where the market is heading.
Recent data revealed that U.S. consumer spending rose for the second straight month in May, climbing 0.4% after a 1.1% gain in Apr 2016 that marked the strongest rise in seven years. This indicates that the U.S. economy picked up in these two months after a slow start in the first quarter of 2016. The report further suggested that income rose 0.2% in May, following a 0.5% increase in April.
However, there is a wave of fear pertaining to how American shoppers will react to Britain's decision to leave the European Union (the ‘Brexit’ vote). Analysts believe that there is a likeliness of consumer spending dropping further ahead as the outcome of Brexit becomes clear. Brexit has not only made global financial markets volatile, it has also created uncertainty over the prospects of the world economy.
Concurrently, a report by the Commerce Department suggests that the third estimate of real gross domestic product (GDP) expanded at an annual rate of 1.1% in the first quarter of 2016, above the second estimate of 0.8%. These reports collectively advocate that the U.S. economy is definitely showing resilience.
We note that the U.S. labor market looks quite stable, with unemployment rate for June making a comeback at 4.9% after falling to 4.7% in May. The report by the Bureau of Labor Statistics indicated that a total of 287,000 nonfarm payroll was added in June, of which retail employment increased 30,000.
Given a rebounding U.S. economy, the retail space is bubbling with optimism. This is evident from June’s 0.8% rise in retail sales, excluding automobiles, gasoline stations and restaurants, from May 2016 and a solid 5.1% increase over Jun 2015, as reported by the nation's largest retail trade group – National Retail Federation (NRF). The federation pointed out that solid growth in June was a follow up of the sales momentum in April and May.
Overall, retail sales is benefitting from a solid rebound in consumer spending as well as job gains and rising income levels. Further, the federation is of the view that this strength provides visibility into the future and expects this momentum to last in the second half of 2016.
Additionally, NRF had projected retail sales for 2016 to rise 3.1%, which is higher than the 10-year average sales growth of 2.7%. Online sales in 2016 are expected to increase in the band of 6–9%.
Market experts expect retail sales growth in 2016 to come on the back of improving wages, job creations as well as steady consumer confidence, which will negate the headwinds from an uncertain global environment.
Key Retail Metrics
The key data in the retail industry analysis is comparable-store sales (comps) as it excludes sales at newly opened and closed stores. We observe that sales data for the month of June, which is the last month of the second quarter, had a positive tone as most retailers’ posted better-than-expected comps.
The list of gainers in June was led by the clothing retail chain L Brands Inc. (LB - Free Report) that posted a comps gain of 6% and sales improvement of 5% to $4.7 billion. This was followed by the long distressed, teen retailer The Gap Inc. (GPS - Free Report) that reported a 2% increase in both comps and sales. This marked the company’s comeback after 14 consecutive declines in comps, all thanks to revival of its Old Navy brand.
Going down the line, warehouse retailer Costco Wholesale Corp. (COST - Free Report) posted flat comps in June, while total sales rose 3% to $11.33 billion. Comps came in flat but were ahead of analysts’ expectations.
On the other hand, the list of disappointers for the month was topped by The Buckle Inc. (BKE - Free Report) which witnessed a 10.6% decline in comps and a 10.1% fall in net sales to $78.3 million for June. It was followed by apparel and accessories retailer Cato Corp. (CATO - Free Report) that reported an 8% decline in comps while net sales slumped 6% to $88 million.
Further, Washington-based retailer of sports-related teen apparel Zumiez Inc. (ZUMZ - Free Report) reported a 4.5% decline in comps, with sales falling 0.6% to $66.6 million from the year-ago period. While this marked the company’s fifteenth consecutive comps decline, it marked an improvement from analysts’ expectations.
At the bottom of the list was discount store operator Fred's Inc. with a 1.3% fall in comps for June.Fred's net sales slipped 2.3% to $208.5 million.
Zacks Industry Rank
Within the Zacks Industry classification, Retail/Wholesale (one of 16 Zacks sectors) is divided into two categories -- Nonfood Retail-Wholesale and Food/Drug- Retail/Wholesale under the Medium (M) Industry Group and further sub-divided into 14 industries at the expanded (X) level -- Building Products-Retail/Wholesale, Internet Commerce, Retail/Wholesale Auto/Truck, Retail-Apparel/Shoe, Retail-Consumer Electronics, Retail-Discount, Retail-Drug Store, Retail-Jewelry, Retail-Miscellaneous/Diversified, Retail-Restaurants, Retail-RGN Department, Retail-Supermarket, Retail/Wholesale-Auto Parts and Retail/Wholesale CMP.
We divide the 16 Zacks sectors into 60 M-level industries and 250 X-level industry groups. We rank all the 250 plus industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. To learn more visit: About Zacks Industry Rank.
As a point of reference, the outlook for industries with a Zacks Industry Rank #88 and lower is 'Positive,' between #89 and #176 is 'Neutral' and #177 and higher is 'Negative.'
The Zacks Industry Rank is #33 for Retail/Wholesale CMP, #47 for Retail-Discount, #63 for Retail-Miscellaneous/Diversified, #84 for Internet Commerce, #93 for Retail-Consumer Electronics, #150 for Retail-Restaurants, #177 for Retail/Wholesale-Auto Parts, #185 for Retail-RGN Department, #213 for Building Products-Retail/Wholesale, #222 for Retail-Drug Store, #225 for Retail-Apparel/Shoe, #225 for Retail-Supermarket, #245 for Retail-Jewelry and #254 for Retail/Wholesale Auto/Truck.
On analyzing the Zacks Industry Rank for the constituent industries in this space, it is apparent that the overall outlook for the Retail/Wholesale sector is Negative.
Sector Level Earnings Trends
The Q2 earnings season has effectively started with results from 126 S&P 500 members, accounting for 32.7% of the index’s total market capitalization, already on the books as of Jul 22. Of the 16 Zacks sectors, Finance, Transportation, Construction, Consumer Staples, Basic Materials and Technology have considerably reported results so far.
For Q2 as a whole, combining the actual results from the 126 index members with estimates from the upcoming 374 companies, total earnings are expected to be down -3.4% from the same period last year on -0.5% lower revenues. The blended Q2 growth rate has improved as companies have come up with better-than-expected results. However, the quarter still on the track to be in the negative zone for the 5th consecutive time.
Coming to the retail sector, the earnings season is still to come in full force as only 27.3% of the total space has released Q2 results so far. Total Q2 earnings for the Retail sector in the S&P 500 are down 4.4% from the same period last year, on a 0.6% decline in revenues, with 33.3% beating EPS estimates and only 16.7% coming ahead of top-line expectations.
Combing results on the board and upcoming, Q2 forecasts show that earnings for the Retail sector are expected to drop 0.5%, whereas revenues are anticipated to increase 4.7%.
For more details on earnings of this sector and others, please read our ‘Earnings Trends’ report.