Outlook For Q4 Retail Sales – Frozen By Polar Vortex, Slow Economy

January 21st, 2014 by

Early indications are that the retail year’s fourth quarter, ending Jan. 31 at many companies, will show a remarkably slow sales pace. The weather didn’t help.

In the Thomson Reuters U.S. retail universe, there have been 74 negative earnings per share pre-announcements issued by retailers for Q4 2013, compared to only 15 positive EPS pre-announcements. By dividing 74 by 15, one arrives at a negative/positive ratio of 4.9 for the universe.

EXHIBIT 1. THOMSON REUTERS RETAIL UNIVERSE – EARNINGS GUIDANCE Q4 2013

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Source: Thomson Reuters I/B/E/S

Slow economy, bad weather

Retailers are warning investors not to expect much from their bottom lines as an uncertain economy kept many wallets closed. Lululemon Athletica Inc. was one of many retailers that blamed weather. Not only did the “polar vortex” of below-zero temperatures keep shoppers from going to the malls, it disrupted supply chain management. That’s especially critical for LULU since the firm is still recuperating from an embarrassing recall of see-through yoga pants.

Best Buy is another company that reported anemic holiday comps. Although several retailers lowered EPS guidance, e-commerce sales seem to have done well during the holiday. BBY reported -0.9% November-December sales, but saw double digit growth on their e-commerce site of 23.5%.

During the November-December holiday season, the retail environment was highly promotional, pressuring margins and EPS. Retailers are lowering earnings guidance due to weaker holiday traffic and sales. As if that wasn’t bad enough, the January post-Christmas clearance sales were affected by the bad weather. As a result, many retailers might not end the year with inventories on plan.

What’s key for retailers now is to clear excess inventory by taking necessary markdowns in the next quarter to transition cleanly into the spring season.

As a result of the negative guidance, analysts have become bearish on retailers, and have been lowering both earnings and same store sales expectations since the beginning of the quarter. At the beginning of the quarter (November, 2013) the Same Store Sales growth estimate for the holiday season was 2.0%. Today, it is 1.4%, as seen in the chart below.

EXHIBIT 2. THOMSON REUTERS SAME STORE SALES Q4 2013 ESTIMATES – AS OF NOV 2013 AND JAN 2014

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Source: Thomson Reuters I/B/E/S

Sluggish teen, discount sectors

The teen sector (a proxy for discretionary spending) saw the steepest decline in analysts’ revisions, followed by department stores.

Digging deeper into the data, it’s evident that the low-income consumer is being hurt by unemployment, loss of government programs like food stamps and higher payroll taxes. As a result, the discounters saw a large number of downward revisions from analysts.

Brighter online, housing sectors

Cold weather kept shoppers at home, but not from shopping online and watching movies.

Within the S&P 500, Netflix has the fifth strongest earnings growth rate at 404.8% for Q4 2013 and Amazon has the 12th strongest earnings growth rate at 214.3%. Overall, the Internet-retailing sector is expected to see a jump of 58% in earnings for Q4 2013.

One brighter area is housing, since the middle/high end class consumer is still buying houses. Within the S&P 500, homebuilders are expected to see a jump of 58% for the quarter. This is also benefiting the financial sector as the consumer is still refinancing and that sector is expected to post a jump of 23.2% in earnings for the current quarter.

 
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