Morgan Stanley analyst Alex Straton is approaching the upcoming retail earnings season with a sense of déjà vu and added caution. As the reports start rolling in on Tuesday, Straton predicts a wave of earnings that exceed expectations, despite lingering concerns about consumer spending.
According to Straton, the upside for earnings will be there, but it may not match the same magnitude as previous quarters. This bodes well for investors, as the consensus remains that consumers are becoming more cautious about their spending habits.
While the S&P 500 has seen a 16% gain this year, the SPDR S&P Retail ETF (XRT) has only managed to climb 9%. This performance suggests that the retail sector might not be aligning with the broader market growth.
This week, Home Depot (HD) will kick off the retail earnings season, followed by Target (TGT), TJX, and Walmart (WMT). These reports will shed light on the current state of the retail industry and offer insights into consumer behavior.
Industry experts, economists, and analysts have been warning of a potential slowdown in consumer spending for quite some time. While this prediction did not manifest in most of 2022 and the first half of 2023, recent signs indicate that the slowdown might finally be here.
In the latest round of profit reports from restaurants, a new pattern emerged. Earnings surpassed expectations, but revenue fell short. The primary reason for this discrepancy is the fading consumer demand. This trend could continue in the coming weeks.
However, D.A. Davidson analyst Michael Baker believes that companies will report that sales have slowed but are still holding up relatively well compared to earlier in the year. Additionally, Baker notes that margins and profits can still rise due to lower costs in freight and production, allowing for some flexibility.
Overall, analysts are approaching this retail earnings season with cautious optimism. While there may be some slowdown in consumer spending, companies still have opportunities to navigate successfully and maintain profitability.
Uncertainty clouds the retail industry
As the second half of the year unfolds, the retail industry is facing a level of uncertainty. While some sectors remain relatively stable, others are grappling with challenges that could impact their performance.
Off-price retailers like TJX are expected to fare well in the coming months, as consumers become more cautious about their spending habits but still have some disposable income. Meanwhile, big-box retailers are enjoying robust sales, as they are seen as delivering value for money. Walmart, for instance, recently reached a record high in its stock price.
However, retailers focused on discretionary spending are entering earnings season on shaky ground. The likes of Levi Strauss & Co., Under Armour, Ralph Lauren, and Lulu’s Fashion Lounge Holdings have already released mixed reports. Levi’s and Lulu’s even revised their full-year guidance downwards. Under Armour maintained its outlook but lowered its U.S. sales expectations.
Chip Bergh, Levi’s CEO, acknowledged that the price-sensitive consumer is feeling the effects of higher inflation and a slowing U.S. economy in a call with analysts in July.
Additionally, home improvement retailers could face challenges this earnings season due to high interest rates, which are dampening housing sales and discouraging people from undertaking renovations.
Given the uncertain landscape, investors will closely monitor management commentary and any changes in financial forecasts to gauge how consumer spending is shaping up for the rest of the year.
Additionally, investors will be focused on inventory shrink, which refers to losses of products. Shrinkage can be caused by theft by both staff and customers, administrative errors, and damage. Retail theft has been on the rise, putting pressure on margins. Therefore, any updates on theft mitigation strategies will be welcomed.
