The second-quarter earnings season is winding down with a final flurry of numbers from the retailers that paints a complicated picture for investors. There are several dynamics posing challenges, including the paradigm shift, forward expectations and the inevitable realities that occur and nobody is currently considering.
But before we get to the numbers and implications, take a look at the July Retail Sales report below, which came in well above consensus and represented the strongest increase so far this year.
There were positive surprises in motor vehicles and departments stores, as well as continued strength in building materials and garden supplies, furniture and online commerce. At the same time, the report also reflected a troubling environment for sporting goods retailers.
| July Retail Sales | Month-over-Month | Year-over-Year |
| Motor Vehicles | +1.2% | +5.7% |
| Furniture | +0.4% | +5.6% |
| Electronics | -0.5% | -0.9% |
| Building Materials & Garden Supplies | +1.2% | +8.3% |
| Grocery | +0.3% | +2% |
| Clothing | -0.2% | +1.5% |
| Sporting Goods | +0.3% | -4.2% |
| Department Stores | +1% | -1.3% |
| Online Commerce | +1.3% | +11.5% |
| Restaurants | +0.3% | +3.4% |
| Retail Sales Total Change | +0.6% | +4.2% |
3 Messages from the Season
Earnings season always tells us a lot about certain companies and the sectors they’re in, and this cycle, there are three messages that stand out. Let’s talk about each:
The Amazon Effect: Several names that mentioned Amazon.com, Inc. (NASDAQ:AMZN) during their conference calls or are known to be in the crosshairs of the internet giant saw their shares tumble after their reports — even if the numbers and guidance were solid. I think there was an overreaction in two stocks in particular:
- Home Depot Inc (NYSE:HD), which fell as much as 4% after releasing its second-quarter results
- Coach Inc (NYSE:COH), which fell as much as 16% following its fiscal fourth-quarter numbers
There is no doubt that online sales, especially from Amazon, pose a potential deathblow to several companies, including sporting goods retailer Dick’s Sporting Goods Inc (NYSE:DKS). Its shares were annihilated after posting earnings.
Brands Thrive: Higher-end brand like Michael Kors Holdings Ltd (NYSE:KORS) and Ralph Lauren Corporation (NYSE:RL) are performing well, as well-known and upscale names benefit in a retail environment where consumer confidence is strong, wages are growing and job security is at its highest level in years. Plus, these brands can be sold both in brick-and-mortar stores as well as online.
Low Expectations: In general, retailers have consistently disappointed the Street over the last couple of years, resulting in their shares drifting and falling off the radar of many active investors and traders.
However, two beneficiaries of the low expectations are Urban Outfitters Inc (NASDAQ:URBN) and Target Corporation (NYSE:TGT), which both rallied after providing better-than-expected results although they were by no means blowout quarters. I’m keeping an eye on these names, but I don’t typically like to chase them until there is more evidence that management has a better handle on execution.
Bottom Line
Consumers have discretionary cash and will put more and more to work although a larger portion will go to living in the moment — things like cruises and other experiences. Investing in the consumer has never been more complicated, but there are lots of ways to take a smart and balanced approach.
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