Retail Q2 Earnings Preview: Economic Data Offers Merchants a Mixed Bag
2023.08.14 16:03
The nation’s retailers saw mixed sales results during the second quarter despite an improving inflation picture—a sigh of relief, at least for shoppers. Price increases are now less than half the size of a year ago.
However, as Walmart (NYSE:), Target Corporation (NYSE:), and Home Depot (NYSE:) report earnings this week, investors may wonder if executives will talk less about the consumer economy turning a corner and more about it heading into a potentially dark alley.
A week ago, the Federal Reserve Bank of New York reported that second-quarter credit card balances rocketed by $45 billion to a total of $1.03 trillion—the first time that measurement has ever topped $1 trillion. And though it’s been in the news for a while, on October 1, the three-year COVID-19 moratorium on college student loan payments finally ends. More about both is below.
It’s also notable that the steady Q2 incline in consumer discretionary spending (see Figure 1) has begun to waver in the early weeks of Q3. But even though we’re still in the dog days of summer, retailers’ all-important spending season increasingly seems less about the Q4 holidays and more about the second half of the year. With its focus on high-ticket electronics and high-margin apparel, many retailers may depend even more on the already-underway back-to-school shopping season now that some students are back on campus. And then, retailers’ focus will shift to Halloween and into the November and December holidays.
But what about the consumer? On Friday, the early sentiment reading from the University of Michigan dipped a bit but still finished at 71.2, slightly beating forecasts. Many investors might see this as a pivotal moment as factors like those above could reshape their behaviors—or not.
Tomorrow’s July retail sales report should deliver additional insights as well.
Across all industries, Q2 earnings have been down year over year, and analyst predictions for the retail segment’s upcoming results have generally trended lower, so it’ll be interesting to see if there are significant surprises, particularly from Walmart. But on the earnings calls afterward, investors may want to tune in to see how management addresses the following trends.
Rising consumer debt: In late July, TransUnion (NYSE:) reported that when student loan payments restart on October 1, more than half of the 27 million consumers carrying that debt will have to make payments of more than $200 a month, and 20% will have to start repaying more than $500 a month. COVID-19-era student loan forbearance began in March 2020 when pandemic shutdowns began. The credit rating giant further noted that 53% of consumers picked up a new credit card, 31% added a new retail store card, and 36% took on a new auto loan while student loan payments were paused. Could larger debt payments keep shoppers at home, and could retailers be forced to squeeze margins at year-end to bring them back in-store or online?
Inflation’s not licked yet: Though July’s Consumer Price Index (CPI) increase met expectations, Friday’s Producer Price Index (PPI) came in hotter than expected—and wholesale prices eventually affect what consumers will pay at retail. Services growth rose too. Retail executives may have their own viewpoints on how wholesale economic data eventually shakes out in households, so listen for those insights.
School spending shifts: Deloitte projected in July that overall back-to-school K-12 retail spending was expected to decrease by 10% this season, with clothing and technology expected to be down a respective 14% and 13% from last year’s levels. Parents appear to be shifting their dollars toward basic school supplies, where spending is projected to rise 20% over last year. Could lower technology and apparel spending for the fall translate into bigger sales at year-end, or not at all?
Real estate resets: In late July, real estate investment firm CBRE reported that Q2 retail construction was at its third-lowest quarterly level in a decade, particularly with return-to-office strategies still uncertain in many major population areas. One bright spot—is neighborhood strip malls that meet shoppers closer to home. As for larger, typically enclosed malls, The Wall Street Journal reported in July that older, lower-end properties are worth at least 50% and in some cases 70% less than their peak valuation year of 2016. Defaults are expected to head upward, with more than $14 billion in loans backed by these properties coming due in the next year. Listen for indicators of how traditional mall retailers may respond.
Transportation as a mirror: As post-pandemic spending patterns continue to shake out, investors may also want to track the parallel concerns of shippers and logistics companies that deliver goods to stores and their customers. Last week, United Parcel Service (NYSE:) cut its full-year revenue and profitability targets after settling a new labor contract amid lower e-commerce revenue. As shoppers continue to realign their behavior post-pandemic, investors might want to watch the fortunes of shippers and stores on a parallel basis.
Dow Jones US Retail Index
FIGURE 1: BALM BEFORE THE STORM?
Prices started to temper somewhat in Q2, sending the Dow Jones U.S. Retail Index ($DJUSRT—candles) and the (pink line) upward by the end of the quarter. Meanwhile, the (blue line) did what it usually does when consumers feel a bit more flush, losing nearly 1% over the period. With high consumer debt levels and a still-uncertain rate environment ahead, will staples stage a 2022-like comeback? Keep watching. Data source: S&P Dow Jones Indices. Chart source: thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
Here’s a quick look at what to watch for as the following retail leaders report.
Home Depot’s (HD) scheduled report date: Tuesday, August 15, before the open
- Expected Q2 EPS (analyst consensus): $4.45
- Year-ago Q2 EPS: $5.05
- Expected Q2 revenue (analyst consensus): $42.24 billion
- Year-ago Q2 revenue: $43.79 billion
Lowe’s (NYSE:LOW) scheduled report date: Tuesday, August 22, before the open
- Expected Q2 EPS (analyst consensus): $4.50
- Year-ago Q2 EPS: $4.67
- Expected Q2 revenue (analyst consensus): $25.02 billion
- Year-ago Q2 revenue: $27.48 billion
What to listen for on the earnings calls
Home Depot Inc (NYSE:) and Lowe’s Companies Inc (NYSE:), the nation’s two largest home-improvement chains, remain hostages to the current rate environment, as homeowners with significant equity and money to buy paint still don’t want to leave their lower-rate mortgages behind.
A recent report in Barron’s, quoting the Telsey Advisory Group, said pressure from short supplies of homes keeping prices high and current homeowners unwilling to move could keep the home market lagging well into 2024—bad news for anyone who supplies recent homeowners.
Will executives at HD and LOW be able to find new ways to sell around that?
Target (TGT) scheduled report date: Wednesday, August 16, before the open
- Expected Q2 EPS (analyst consensus): $1.48
- Year-ago Q2 EPS: $0.39
- Expected Q2 revenue (analyst consensus): $25.49 billion
- Year-ago Q2 revenue: $26.04 billion
What to listen for on the earnings call
First, a caveat: Exactly a year ago, Target Corporation’s (NYSE:) 2022 quarterly results took a huge hit to sell off unwanted inventory. However, the news wasn’t much brighter in May when the firm warned investors that its shoppers were walking past nonessential items like home goods and electronics on the way toward staples—for which TGT isn’t a main destination. Unlike Walmart Inc (NYSE:), Target is seen as a discounter of mostly discretionary products, which makes it a good barometer of when economic conditions are headed up. But it’s worth noting that with the brick-and-mortar exit of Bed Bath & Beyond (OTC:) in recent months, executives of both chains may be asked how they’ll fit that gap in the marketplace. Some might wonder if executives think caffeine might help: Target announced last week that its in-store Starbucks (NASDAQ:) locations would offer curbside food and beverage pickup. But will that also get the customers to park and come in?
Walmart (WMT) scheduled report date: Thursday, August 17, before the open
- Expected Q2 EPS (analyst consensus): $1.68
- Year-ago Q2 EPS: $1.77
- Expected Q2 revenue (analyst consensus): $159.56 billion
- Year-ago Q2 revenue: $152.86 billion
What to listen for on the earnings call
WMT shares have continued on their ascent since early March and among recent upgrades, Piper Sandler upgraded from neutral to overweight and Oppenheimer reaffirmed its outperform rating on the stock. As the nation’s biggest grocer and discount chain, analysts see a slight decrease in Q2 profit as prices have tempered somewhat, but investors might want to listen to how WMT plans to respond if inflation reheats or other economic negatives surface.
Macy’s (M) scheduled report date: Tuesday, August 22, before the open
- Expected Q2 EPS (analyst consensus): $0.13
- Year-ago Q2 EPS: $0.17
- Expected Q2 revenue (analyst consensus): $5.08 billion
- Year-ago Q2 revenue: $5.6 billion
What to listen for on the earnings call
As the nation’s biggest traditional department store chain, M serves the middle market with Macy’s Inc (NYSE:), the upscale customer with its Bloomingdale’s brand, and the beauty-conscious with the Blue Mercury chain it acquired in 2015. However, in June, despite beating on Q1 earnings, it cut its full-year outlook after seeing sales slide in April. As of today, shares were down more than 22% for the year, so that’s the obvious conversation-starter for executives. Will current performance mean closing more stores, resetting merchandising, or possibly other steps?
Best Buy (BBY) scheduled report date: Tuesday, August 29, before the open
- Expected Q2 EPS (analyst consensus): $1.06
- Year-ago Q2 EPS: $1.54
- Expected Q2 revenue (analyst consensus): $9.51 billion
- Year-ago Q2 revenue: $10.33 billion
What to listen for on the earnings call
The nationwide electronics superstore said back in May that its shoppers were showing “recessionary behaviors” in an already slowing market for home electronics and appliances. After all, so many pandemic-era purchases are still humming. With tepid industry forecasts on computers and other digital devices for back-to-school, that doesn’t bode well for Best Buy Co Inc (NYSE:), but executives have also re-staffed and reset store offerings in recent months. Investors will want to know if that’s restoring some power.
