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Why It’s Been a Tough Period for the Retail Sector

The tone for the sector includes earnings revisions...downward

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The Retail sector is in focus this week, with a number of major retailers like Target (TGT), Macy’s (M), Gap (GPS), Home Depot (HD) and others releasing quarter results. It has been a tough period for the sector, as Wal-Mart (WMT) recently reconfirmed, with weather adding to the sector’s many other challenges.

The final quarter of the year is the seasonally strongest for the retail sector. But the last holiday season was challenging for many retailers from the get go, with a tough competitive environment forcing heavy promotions on many to move merchandise. Weather wasn’t much of a problem earlier on in the quarter, but has been outright nasty ever since.

The chart below shows how estimates for the sector for the final quarter of 2013 have evolved lately. Please note that the current growth estimate of -4.5% represents a composite of the 25 S&P 500 retail sector companies that have reported and the 17 still to come.

The Retail sector’s Q4 problems have continued into the current period as well, with most companies guiding lower for 2014 Q1, as we saw recently with Wal-Mart and Nordstrom (JWN). The chart below shows how 2014 Q1 earnings expectations for the sector have evolved since the Q4 reporting season got underway.

In fairness to Retail, they are hardly the only one suffering negative estimate revisions as 2014 Q1 estimates for most of the other sectors have been moving in that direction as well. As has been the case for more than a year now, the predominant tone of management guidance was negative this earnings season as well, prompting estimates for Q1 to come down.

The chart below shows the evolution of 2014 Q1 earnings estimates for the S&P 500 as a whole since the start of the current earnings season.

Q4 Earnings Scorecard (as of Friday, 2/21/2014)

Total earnings for the 444 S&P 500 members that have reported already, combined accounting for 93.4% of the index’s total market capitalization,  are up +10.2% from the same period last year, with a ‘beat ratio’ of 68.2% and a median surprise of +2.4%. Total revenues are barely in the positive column, up only +0.7%, with a revenue ‘beat ratio’ of 60.6% and a median surprise of +0.7%.

More companies have beat earnings and revenue expectations than has been the case in recent quarters, as the chart below shows. Perhaps expectations had fallen a bit low ahead of the Q4 reporting season.

The earnings growth rate for these 444 companies is better than what we saw from this same group of companies in Q3 and the 4-quarer average. A big contributor to the strong Q4 earnings growth is easy comparisons for three companies – Bank of America (BAC), Verizon (VZ), and Travelers (TRV). Exclude these three companies and total earnings growth for the S&P 500 companies that have reported drops to +6.2% from the ‘headline’ +10.2%, which is about where growth has been in recent quarters.

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