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Play the Retail Sector for Quality Earnings, Stock Prices

Retail sector earnings are in the spotlight, with the reporting cycle over for most of the other sectors. Retail got off to a good start this earnings season, with growth rates and beat ratios coming in better relative to pre-season expectations as well as other sectors.

Retail Shopping

The aggregate earnings picture for the retail sector still compares favorably to other recent periods, as the sector’s initial reports were mostly from operators in the online and restaurants spaces. Comparisons have started to become less favorable following the weak showing from department stores like Macy’s, Inc. (NYSE:M), Kohl’s Corporation (NYSE:KSS) and others.

This week’s reports from sector leaders like Wal-Mart Stores, Inc. (NYSE:WMT), Target Corporation (NYSE:TGT), Home Depot Inc (NYSE:HD) and others will help give us a true picture for the retail sector.

It has been a tough operating environment for the retail sector, with a combination of weather issues in the first quarter of the year and logistical challenges related to west coast ports adding to longstanding competitive challenges. We are seeing these factors getting cited to varying degrees in the department store results.

On top of these known issues is the uncertain consumer spending backdrop, with retailers’ hopes of benefiting from low oil prices not coming to fruition. The tentative consumer spending behavior is not only visible in the soft department store results but also in other aggregate economic data.

The monthly Retail Sales from the government came in short of estimates recently, with this monthly measure now down or flat in three of the last four months. The unexpected drop in the University of Michigan’s consumer confidence measure for May adds to these challenges.

As of Friday, May 15, we have seen Q1 results from 25 retailers in the S&P 500 index, out of the 41 total in the index. Total earnings for these 25 retails are up 6.5% from the same period last year on 10.9% higher revenues with 84% beating earnings-per-share estimates and 52% coming ahead of top-line expectations.

This is better performance than we have seen from these 25 retailers in other recent periods, as the comparison chart below shows. Importantly, the retail sector’s earnings beat ratio is currently the highest of all 16 sectors, and its revenue beat ratio is the fourth highest.

The charts above compare the retail sector’s results thus far with what these same 25 retail stocks reported over the past year. As you can see, the earnings growth rate at 6.5% is better than what we saw from the same group of companies in 2014 Q4  (up 2.6%) and the four-quarter average of 3.7%.

The positive 10.9% revenue growth rate for the retail sector is the highest in the S&P 500 index, though the growth rate drops to a still high 7.4% once the easy comparisons at Walgreen Boots Alliance Inc (NASDAQ:WBA) are adjusted. And as referred to earlier, the retail sector’s earnings and revenue beat ratios are materially better than what we seen for the broader index as a whole.

Retail stocks have been strong performers lately, with retail stocks in the S&P 500 handily outperforming the broader index in both the year-to-date and trailing 52 weeks as well as in response to the results that have come out already. In fact, the stock price reaction to Q1 earnings announcements is the highest of all 16 sectors in the S&P 500 for the Retail sector (see second last column in Figure 1 below).

This could change in the coming days as more retailers report results. But at this stage at least, the retail sector stands for its earnings and stock price performance.

Q2 Estimates Keep Falling

With the Q1 earnings season effectively behind us now, attention is shifting to the current period, particularly to trends in Q2 earnings estimates.

On the front, we are seeing a continuation of the negative revisions trend that has been in place for more than two years now. Estimates for the current quarter, which had fallen quite a bit already in solidarity with the Q1 estimate cuts, have started coming down even more.

The chart below shows how earnings growth estimates for Q2 have evolved since the beginning of the year.

Note: For a complete analysis of 2015 Q1 estimates, please check out our weekly Earnings Trends report.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/05/retail-sector-retail-stocks-earnings-season-winds-earnings/.

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