Earnings Roundup: A Big “Miss” from JC Penney Spoils the Picture for Retailers
There aren’t many companies in the S&P 500 index that have yet to report their earnings for the first quarter of 2012, but as we approach the end of earnings season, the amount by which those late-reporters have beaten analysts’ expectations has meant that the overall earnings growth rate has edged higher to 8%. Nonetheless, among the retailers that dominated last week’s earnings reports, low growth rates or simply losses that weren’t quite as bad as expected dominated the reports, painting the picture of a quarter that was more “less bad than feared” rather than being straightforwardly “good”.
There is some good news. Along with the “beat rate”, the rate at which member of the S&P 500 are increasing their quarterly revenues reached its high point for the quarter to hit 5.3% by the end of last week. Until mid-April, when companies reported a large number of positive earnings surprises gave a boost to earnings growth results for the quarter, analysts had expected revenue growth would prove to be higher than earnings growth for the quarter. However, the combination of an increase in both earnings and revenue growth rates throughout earnings season caused net profit margins to grow. True, that growth rate was less dramatic, but net profit margins also now stand at close to their peak for the quarter at 9.35%.
Companies across all the sectors in the S&P 500 contributed, one after another, to the rise in reported growth rates during the quarter, as they delivered moderately strong results in place of low expectations. (The Utilities sector was the only holdout.) Last week’s gains can be traced to retailers within the Consumer Discretionary sector; while several are battling major headwinds, they still managed to beat analysts’ expectations and only one of the dozen companies in this group that reported their results for the quarter fell short of those forecasts.
That solitary “miss”, however, was a big one. Analysts had expected JC Penney Company (JCP.N) to post a loss of 11 cents for the first quarter ended April 30. As predicted last week, based on the StarMine SmartEstimate, JC Penney’s results were a negative surprise, as its actual proved to be the far larger loss of 39 cents a share. The retailer’s efforts to abandon its past strategy of relying on coupons and promotions and seems to have alienated its existing customers. Still, the company’s executives are sticking to their guns. Michael Kramer, the company’s chief operating officer, told the earnings conference call that 40% of those “deals” were cases where consumers were applying a coupon to an already-discounted sale price, resulting in what he called a “double down.” “We have got to wean (shoppers) off this and educate our consumers,” he insisted. For now, at least, JC Penney shoppers appear reluctant to be educated, and preferred to stop spending. In the wake of the losses, the retailer announced it was suspending its quarterly dividend payout to shareholders.
Abercrombie & Fitch Co (ANF.N) also bore out StarMine forecasts, by reporting a positive surprise. It announced earnings of 3 cents a share, higher than analysts’ estimates of 2 cents, despite the difficult economic environment in Europe. The region accounts for 20% of the company’s revenues, and Abercrombie & Fitch has a strategy that relies on rapid growth as European consumers – it hopes – flock to their stores. In the company’s conference call, CEO Mike Jeffries addressed this exposure, noting that it is responsible for some of the less rosy trends in same-store sales. “However, it is important to note that given the extraordinarily strong start we made in Europe and putting aside the current cyclical macroeconomic factors at play, we have long been prepared for a period of negative same-store sales,” Jeffries said.
Sears Holdings Corporation (SHLD.O) was another retailer that beat analysts’ forecasts, although that “positive” surprise was actually a matter of delivering a smaller loss than those analysts had predicted. The company lost 31 cents a share, rather than the 67 cents a share analysts had anticipated, and announced further asset sales to shore up its balance sheet, such as the distribution of nearly half of Sears Canada Inc. (SCC.TO) to Sears Holdings shareholders. In an effort to combat problems that range from competition from e-commerce to stores that are too large for its current customer base, Sears believes that the spin-off will help both companies better allocate their resources.
Wal-Mart Stores Inc (WMT.N), on the other hand, seems to be benefitting from the uncertain economic environment, as shoppers continue to hunt for bargains and discounts. The retailing behemoth reported its earnings jumped 11.2% to hit $1.09 a share, trumping the estimate of $1.04 a share. It reported that its same store sales for the period rose 3%, again beating the estimate, which was for growth of 1.9%. Keeping costs low and providing low prices to customers has always been both Wal-Mart’s mantra and its key to success. But with the ongoing concern among job security, and the rise in price of gasoline and other energy costs, that remains particularly crucial, CEO Bill Simon emphasized during the earnings conference call. ”Food is consistently the top monthly expense outside of housing and vehicle payments” for Wal-Mart customers, he said.
Although the retailers that reported their results last week mostly beat analysts’ estimates, the economic uncertainty they are encountering, particularly in Europe, is creating challenging environment for them going forward. True, they continue to beat analysts’ expectations for earnings and revenue growth, but the truth is that this doesn’t translate into unreservedly bullish and upbeat news, as those growth rates remain modest or even negative.
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