Q2 Earnings Update – Will Retail Spoil This Robust Earnings Season?

Find out why the retail sector continues to struggle compared to the upward earnings of S&P 500

   

Q2 Earnings Update – Will Retail Spoil This Robust Earnings Season?

The Q2 earnings season has been very positive; The growth rates are better, more companies are coming ahead of estimates, and there is even some modest improvement on the guidance front.

The retail sector is the focus in this week’s earnings reports, with industry leaders like Home Depot (HD), Target (TGT) and Gap (GPS) reporting Q2 results. Notable earnings reports from other sectors include Hewlett-Packard (HPQ) and Salesforce.com (CRM).

Retail stock-price performance in the S&P 500 continues to be one of the weakest in the index – down 1.1% compared to a 6.5% gain for the index as a whole. Total earnings for 27 retail sector companies in the S&P 500 that have already reported Q2 results are up 2% on revenues that grew 5.9%, with only 40.7% beating earnings estimates and a respectable 55.6% coming ahead of top-line expectations. The 40.7% earnings beat ratio for the sector is the weakest in the S&P 500, matching the sector’s under-performance in Q1. While weather got the blame for Q1, there is no handy excuse now. All signs point to a margin problem.

The big brick-and-mortar retailers have been trying to adjust to the growth of online sales, but as Best Buy (BBY) and Walmart (WMT) struggle, how the big-box business model will evolve remains to be seen. Additionally, consumers have yet to fully recover from the financial crisis. In a nutshell, it has been a tough earnings season for retailers.

The Total Q2 Scorecard

(as of Friday morning, August 15)

Total earnings for the reported 470 S&P 500 members are up 8.2% year over year, with a 66% beat ratio and a positive 2.7% median surprise. Total revenues are up 4.4%, with a 61.3% revenue beat ratio and a positive 0.8% median surprise.

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The charts below compare the Q2 earnings reports thus far from these 470 companies with their performances in recent quarters.

Earnings and Revenue Growth Rates

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Beat Ratios

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The revenue growth rates and beat ratios are notably better relative to what we have become used to seeing in recent quarters.

Small-Cap Stocks Update – S&P 600 Q2 Scorecard

Prices of small-cap stocks have been underwater this year, with the S&P 600 down 2.5% compared to a 6.5% gain for the S&P 500 in the year-to-date period.

As of Friday, August 15, 89.8% of the index’s total members released Q2 earnings reports. Total earnings for these 539 companies are up 12.6% year-over-year on revenues that grew 11.2%, with 48.8% of the companies beating earnings-per-share estimates and 38.4% exceeding top-line expectations.

The earnings growth is better than what we have seen from the same group of 539 small-cap companies in Q1 as well as the average growth rate of the last four quarters. The earnings beat ratio is in-line with what the same group has performed over that same period. The top-line performance presents a mixed picture, with the growth rate modestly higher while the beat ratios tracking lower.

Here is the updated Q2 earnings reports scorecard for the S&P 600.

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The table below compares price performance and earnings multiples for the S&P 500 and S&P 600 indexes.

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The Composite Q2 Picture for the S&P 500

The composite (or blended) growth picture for Q2, combining the actual results for the reported 470 S&P 500 companies with estimates for the 30 still-to-come reports, shows total earnings increasing 8.0% on revenues that grew 4.4% and modestly higher net margins. This would follow earnings growth of 1.3% in Q1 on revenues that grew 2.8%.

The table below compares what is expected for Q2 with Q1 earnings reports.

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Record S&P 500 Earnings in Q2

Total earnings in Q2 are on track to reach a new all-time quarterly record, surpassing 2013 Q4 earnings season record. The chart below shows these quarterly earnings totals, with estimates for the coming quarters all in the record territory.

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The Sustainability Question

The earnings reports thus far represent a notable improvement compared to recent quarters, but is it a one-off bounce from the low levels in Q1 or the start of something sustainable?

The ongoing revisions trend in estimates for Q2 indicates that this favorable trend is sustainable. Plus, Q3 earnings estimates are better than what we have seen over comparable periods in recent quarters.

For a detailed look at the earnings picture, please check out our weekly Earnings Tends report.

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Article printed from InvestorPlace Media, http://investorplace.com/2014/08/q2-earnings-reports-retail-sector/.

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