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Retail industry

Shopping for results in the retail industry

Jharonne Martis  Director of Consumer Research, Thomson Reuters

Jharonne Martis  Director of Consumer Research, Thomson Reuters

Infographic compares earnings per share and revenue for the retail industry with analysis

Retailers will soon be wrapping up a dismal holiday season with Q4 earnings reports – and the outlook isn’t good. The industry’s fiscal year ends on Jan. 31 and many store chains are signaling that profits will fall below expectations. They are even giving negative guidance for Q1. As a result, analysts polled by Thomson Reuters have been lowering their forecasts for earnings growth rates. Let’s look at the factors and trends.

Weather was an issue – too warm early in the winter to stimulate sales of cold-weather clothing and gear, then a giant blizzard hit the Northeast, keeping shoppers home. The muscular U.S. dollar kept foreign tourists away and the travelers who were in the U.S. didn’t spend as much. The strong dollar also hurt earnings from retail sales abroad. Slowing growth in China’s economy was also mentioned.

Only 19% of the 211 companies in our Thomson Reuters retail/restaurant universe have reported earnings and revenue. And so far, the results are worrisome as total company sales are falling below expectations, and companies continue to cut costs to beat the bottom-line.

Q4 negative guidance

At the beginning of the quarter in November, retailers issued negative earnings guidance 12 times, but that figure rose to 51 as of Feb. 1 (see chart below).

Q4 2015 eps and revenue guidance for retail industry
Source: Thomson Reuters I/B/E/S

Sector analysis

When looking at the sectors, 22 of the 51 pre-announcements that issued negative EPS guidance are in the Specialty Retail industry, followed by the Hotels, Restaurants & Leisure sector (8).

Sector analysis for retail industry earnings

Q1 negative guidance

Similarly, retailers are already warning us about Q1: to date we have received 17 negative earnings guidance and zero positive.

Earnings Guidance Q4 2015 and Q1 2016

Q4 2015 to Q1 2016 earnings guidance for retail industry
Source: Thomson Reuters I/B/E/S

Reasons for negative guidance

In addition to weather, the dollar and China, retailers are also citing rising wage expenses, weak store traffic and tougher same store sales (SSS) comparisons with the previous year and lower gas prices.

Consumer confidence is also down across a couple of indicators, despite the improvement in the job market. This looks like the public has general worries about the markets and national economic health. Consumers are most concerned with current conditions, including the U.S. stock market and global turmoil.

Turning to Europe, companies with exposure there cite global fear after the recent attacks in Paris hurt tourism travel – including hotel cancellations.

Earnings pessimism

Due to all the negative guidance, analysts polled by Thomson Reuters have been lowering earnings estimates. At the beginning of the quarter, analysts estimated overall earnings growth of 5.3%. Now that estimate is 3.9%. Six of the eleven sectors have experienced downward revisions.

Growth Rates for the Thomson Reuters Retail & Restaurant Earnings Index

Retail industry growth rates
Source: Thomson Reuters I/B/E/S

Revenue, earnings scorecard

So far, only 19% of the 211 companies in our retail/restaurant universe have reported earnings and revenue. The bulk are beating earnings estimates but missing revenue. This means that companies are reporting sales weaker than anticipated – and they’re cutting costs to score an earnings beat – a worrisome sign.

Of the 211 companies in the Thomson Reuters Retail and Restaurant Earnings Index, 40 have reported earnings to date for Q4 2015. The score: 68% have reported earnings above analyst expectations, 7% matched, while 25% missed expectations.

One the revenue side, 22% of companies (38 out of 211) have reported Q4 2015 revenue to date, 26% have reported revenue above analyst expectations, while 74% of companies have missed revenue expectations.

This post originally appeared on Lipper Alpha Insight

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