Have Department Store Stocks Turned the Corner?

The impressive stock market performance of department store operators like Macy’s (M), Nordstrom (JWN), Kohl’s (KSS), J.C. Penney (JCP) and others over the last three trading sessions in the run up to and following their quarterly releases would suggest that market participants are starting to see ‘green shoots’ on the horizon for this beleaguered space.

While there is room for optimism for Kohl’s and J.C. Penney shareholders given their better than expected same-store sales performance, the Macy’s earnings beat doesn’t appear to be nothing more than better than expected management execution with respect to expenses and inventories (Macy’s missed same-store sales estimates).

The market’s positive reaction to results from Macy’s and the others isn’t so much reflective of a fundamental reset for these companies, but rather a function of the extremely bearish sentiment on these names. For example, despite the roughly +7% pop in Macy’s shares over the last three sessions, the stock is down -44% this year, underperforming the Zacks Department Store industry’s -36.1% drop and the S&P 500 index’s +15.9% gain. There is a buyer for every stock at the ‘right price’ and the prices for Macy’s and others likely had overshot to the downside.  

The broader retail sector, however, has done really well this year; in fact the sector has done better than the S&P 500 index. The Zacks Retail sector is up +22.1% in the year-to-date period, doing better than the broader market. The broader sector’s outperformance primarily reflects the reality that the Zacks Retail sector not only houses the likes of Macy’s and other brick-and-mortar operators, but also online vendors like Amazon (AMZN) that are behind the traditional operators’ never-ending pain.

You can clearly see this dynamic at play in the year-to-date chart below plotting Macy’s (red line) against the Zacks Department Store industry (blue line) and Amazon (green line).

The issues are well known by now - these operators needed literally to reinvent their businesses to effectively operate in an environment where consumers are steadily shifting their spending dollars to the online medium instead of visiting the physical store. This obviously isn’t just a 2017 phenomenon and has been around for a while now, but we get to see an interesting dynamic at play if we look at the same chart on a longer time horizon, say 5 years, as in the chart below.

What is interesting about this longer time horizon chart is that Macy’s, the department store space as a whole and Amazon shares are roughly moving in-line with each other for quite a while, through July 17, 2015 to be precise. In other words, what seem such obvious existential secular headwinds facing this space at present are only so with the benefit of hindsight; the market had no idea what lay ahead for Macy’s and its peers prior to that July day in 2015. The takeaway from this discussion is that many trends that appear crystal clear in retrospect are anything but that in real time.

What’s the significance of that date in July 2015? Amazon held its first Prime Day on July 15th to celebrate the 20th anniversary of its founding, which it claimed turned out to be bigger than Black Friday. As you can see in the chart above, the world has never been the same since that day, particularly for Macy’s and its department store peers.

Retail Sector Scorecard

As of Friday, November 10th, we now have Q3 results from 22 of the 39 retailers in the S&P 500 index. This week brings results from the big-box operators Wal-Mart (WMT), Target (TGT), Home Depot (HD) and others. Total earnings for the 22 retailers that have reported already are up +2.3% from the same period last year on +10.1% higher revenues, with 81.8% beating EPS estimates and 63.6% beating revenue estimates.

Please note that we have a stand-alone Retail sector, unlike the official Standard & Poor’s placement of this space in their Consumer Discretionary sector. The Zacks Retail sector includes, besides the traditional department stores and other brick-and-mortar retailers, the online vendors like Amazon and Priceline and restaurant operators. Results from the online vendors and most of the restaurant operators are already behind us at this stage.  

The side-by-side charts below compare the sector’s results thus far with what we have seen from the same group of 22 retailers in other recent periods.

The aggregate earnings growth pace from the 22 retailers that have reported results already are tracking below what we had seen from the same companies in other recent periods, though revenue growth is notably above other recent periods. Positive surprises are as numerous in this sector as they have been all along in other sectors this earnings season.

A big driver of the top-line growth momentum is Amazon whose Q3 revenues were up +33.7% from the year-earlier period. As you can see in the growth comparison charts below, the sector’s reported Q3 revenue growth halves on an ex-Amazon basis (right-hand side chart).

We will get Retail’s complete picture following this week’s results from Wal-Mart, Target, Home Depot and others.

Q3 Earnings Season Scorecard (as of Friday, November 10, 2017)

We now have Q3 results from 457 S&P 500 members or 91.4% of the index’s total membership. Total earnings for these companies are up +6.7% from the same period last year on +6.1% higher revenues, with 72.6% beating EPS estimates and 66.5% beating revenue estimates.

The charts below compare the Q3 results thus far from the 457 index members with what we had seen from the same group of companies in other recent periods.

Looking at Q3 as a whole, combining the actual results from the 457 S&P 500 members that have come out with estimates for the still-to-come 43 index members, total earnings are expected to be up +6.3% from the same period last year on +5.6% higher revenues. Excluding the weak results from the Finance sector, total earnings for the rest of the index would be up +10% on +6.1% revenue growth. The table below shows the summary picture for Q3, contrasted with what was actually achieved in the preceding earnings season.

Four Takeaways From the Q3 Earnings Season

First, we saw a clear momentum on the revenue front, with growth accelerating from other recent periods. Total revenues for the 457 S&P 500 members that have reported results, as of Friday, November 10th, are up +6.1% from the same period last year, which compares to +5.9% top-line growth for the same group of companies in the preceding quarter and still lower average growth rates in the prior periods, as the comparison chart below shows.

Second, the above-average proportion of positive surprises that we saw in the preceding period continued this earnings season as well. We typically don’t give positive surprises a lot of weight in evaluating or assessing an earnings season since we all know that management teams are experts in managing expectations. Even then, the trend emerging in the Q3 earnings season is noteworthy for two reasons. First, estimates for the quarter had not fallen by as much as had historically been the case. Second, the proportion of positive revenue surprises, a much harder variable to manipulate relative to earnings, is only a shade below the preceding quarter’s record level.

The chart below shows the proportion of 457 S&P 500 members that have beaten both EPS and revenue estimates and how that compares to historical periods.

Third, the revisions trend for the December quarter is shaping up to be unusually favorable. The pattern over the last few years has been that as the quarterly earnings reporting season gets underway, estimates for the following quarter would start coming down. This trend improved a bit over the last few quarters when estimates would not fall by as much as was historically the case, but they were nevertheless coming down.

The unusual thing about the Q4 estimates is that they actually went up at first and have started coming down only over the last couple of days, which has brought Q4 growth expectations to where they stood at the start of the period. This is totally different from what we would typically the comparable periods of other earnings seasons over the last few years. This will most likely change as more companies report Q3 results and manage the market’s expectations for the December quarter, but it is nevertheless an unusually positive development.

The chart below shows the evolution of Q4 estimates since the quarter got underway.

Fourth, total Q3 earnings for the S&P 500 index are on track to reach a new all-time quarterly record, surpassing the previous record reached in the preceding earnings season, as the chart below shows.

Please note that the $302.3 billion is the blended earnings total that combines the actual earnings that have come out with estimates for the still-to-come companies.

Expectations Beyond Q3

The chart below shows Q3 earnings growth expectations contrasted with what is expected in the following four quarters and actual results in the preceding 5 quarters. As you can see in the chart below, the growth pace is expected to decelerate from the double-digit level of the first two quarters of the year, but is expected to accelerate to ramp back up from the current period onwards.

Note: Sheraz Mian manages the Zacks equity research department. He is an acknowledged earnings expert whose commentaries and analyses appear on Zacks.com and in the print and electronic media. His weekly earnings related articles include Earnings Trends and Earnings Preview. He manages the Zacks Top 10 and Focus List portfolios and writes the Weekly Market Analysis article for Zacks Premium subscribers.

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Here is a list of the 152 companies including 15 S&P 500 and 11 S&P 600 reporting this week.
 

Company	Ticker	Current Qtr	Year-Ago Qtr	Last EPS Surprise %	Report Day	Time
ATLANTICA YIELD	ABY	0.6	0.33	118.18%	Monday	BTO
AECOM	ACM	0.71	0.65	0.00%	Monday	BTO
ASURE SOFTWARE	ASUR	0.14	0.1	-54.55%	Monday	BTO
CGG	CGG	N/A	-3.95	N/A	Monday	BTO
CYREN LTD	CYRN	-0.06	-0.02	-40.00%	Monday	BTO
FIBROCELL SCIEN	FCSC	-0.41	-0.36	3.12%	Monday	BTO
JD.COM INC-ADR	JD	-0.01	-0.1	0.00%	Monday	BTO
JOUNCE THERAPTC	JNCE	-0.25	N/A	26.67%	Monday	BTO
KAMADA LTD	KMDA	0	-0.03	18.18%	Monday	BTO
PALATIN TECH	PTN	0.06	-0.08	250.00%	Monday	BTO
REDHILL BIO-ADR	RDHL	-0.72	-0.7	-3.45%	Monday	BTO
VIEWRAY INC	VRAY	-0.14	-0.35	-37.86%	Monday	BTO
58.COM INC-ADR	WUBA	N/A	-0.21	15.38%	Monday	BTO
YOUNGEVITY INTL	YGYI	N/A	0	-5.56%	Monday	BTO
ARC GROUP WORLD	ARCW	-0.02	0.05	-166.67%	Monday	AMC
FAMOUS DAVES	DAVE	-0.05	0.01	77.78%	Monday	AMC
DHT HOLDINGS	DHT	-0.1	0.01	100.00%	Monday	AMC
HOLLYSYS AUTOMT	HOLI	0.32	0.37	0.00%	Monday	AMC
LONESTAR RESRCS	LONE	-0.23	-1.47	62.50%	Monday	AMC
LUNA INNOVATION	LUNA	0.01	-0.02	66.67%	Monday	AMC
REMARK MEDIA	MARK	-0.25	-0.3	32.14%	Monday	AMC
MARRONE BIO INV	MBII	-0.24	-0.29	-19.05%	Monday	AMC
MTN PROV DMND	MPVD	N/A	-0.02	N/A	Monday	AMC
EVERSPIN TECH	MRAM	-0.46	-0.54	-5.26%	Monday	AMC
NCS MULTISTAGE	NCSM	0.12	N/A	0.00%	Monday	AMC
NETSHOES CAYMAN	NETS	-0.22	N/A	-95.65%	Monday	AMC
OREXIGEN THERAP	OREX	-2.13	-1.01	24.17%	Monday	AMC
PQ GROUP HLDGS	PQG	0.08	N/A	N/A	Monday	AMC
S&P INDL	SPIN	N/A	-0.01	-28.89%	Monday	AMC
ONE GROUP HOSP	STKS	N/A	0.08	-80.00%	Monday	AMC
SWITCH INC-A	SWCH	0.06	N/A	18.18%	Monday	AMC
PARETEUM CORP	TEUM	-0.17	-1.25	-52.94%	Monday	AMC
WIDEOPENWST INC	WOW	0.12	N/A	20.00%	Monday	AMC
SEVEN STARS CLD	SSC	N/A	-0.05	-275.00%	Monday	N/A
ADVANCE AUTO PT	AAP	1.22	1.73	-4.24%	Tuesday	BTO
HOME DEPOT	HD	1.81	1.6	1.81%	Tuesday	BTO
TJX COS INC NEW	TJX	1	0.91	0.00%	Tuesday	BTO
ARAMARK HOLDING	ARMK	0.52	0.46	2.86%	Tuesday	BTO
CELSION CORP	CLSN	-0.56	-3.22	28.18%	Tuesday	BTO
CONCORDIA INTL	CXRX	0.14	-0.33	26.67%	Tuesday	BTO
DICKS SPRTG GDS	DKS	0.26	0.48	-4.00%	Tuesday	BTO
DHX MEDIA LTD	DMQHF	0.04	0.01	N/A	Tuesday	BTO
DAQO NEW ENERGY	DQ	1.41	1.19	-13.77%	Tuesday	BTO
ELEVEN BIOTHERP	EBIO	N/A	0.91	N/A	Tuesday	BTO
EAGLE POINT CRD	ECC	0.5	0.54	3.92%	Tuesday	BTO
ENERGY XXI GULF	EXXI	-0.44	N/A	N/A	Tuesday	BTO
H2O INNOVATION	HEOFF	N/A	-0.01	0.00%	Tuesday	BTO
INTELLICHECK MO	IDN	-0.08	-0.07	N/A	Tuesday	BTO
INTL GAME NEW	IGT	0.26	0.45	-53.13%	Tuesday	BTO
KULICKE & SOFFA	KLIC	0.36	0.15	47.62%	Tuesday	BTO
LIQTECH INTL	LIQT	-0.01	-0.02	-50.00%	Tuesday	BTO
CHENIERE ENERGY	LNG	-0.16	-0.41	-339.29%	Tuesday	BTO
MEDLEY MGMT INC	MDLY	0.12	0.14	-23.08%	Tuesday	BTO
MAGIC SOFTWARE	MGIC	0.15	0.12	8.33%	Tuesday	BTO
NAVIOS MARIT LP	NMM	0.02	0.07	200.00%	Tuesday	BTO
OBSEVA SA	OBSV	-0.58	N/A	-27.08%	Tuesday	BTO
STRONGBRIDG BIO	SBBP	-0.42	-0.36	0.00%	Tuesday	BTO
SANCHEZ PRODUCT	SNMP	-0.32	1.21	-29.17%	Tuesday	BTO
SUNWORKS INC	SUNW	0.02	-0.29	N/A	Tuesday	BTO
TECNOGLASS INC	TGLS	0.11	0.27	2.50%	Tuesday	BTO
CANOPY GROWTH	TWMJF	N/A	N/A	-52.17%	Tuesday	BTO
VERSO CORP-A	VRS	0.38	N/A	0.93%	Tuesday	BTO
YATRA ONLINE	YTRA	-0.36	-0.71	14.18%	Tuesday	BTO
A-MARK PRECIOUS	AMRK	0.23	0.27	-39.29%	Tuesday	AMC
AMYRIS INC	AMRS	-0.77	-1.05	-27.03%	Tuesday	AMC
APTOSE BIOSCI	APTO	-0.13	-0.24	38.89%	Tuesday	AMC
ALGONQUIN POWER	AQN	0.1	0.07	-9.09%	Tuesday	AMC
AMER RENAL ASSC	ARA	0.16	0.28	33.33%	Tuesday	AMC
ASTERIAS BIOTHR	AST	-0.15	-0.15	0.00%	Tuesday	AMC
AURINIA PHARMA	AUPH	-0.14	-0.19	76.92%	Tuesday	AMC
AUDENTES THERAP	BOLD	-0.86	-0.94	-10.13%	Tuesday	AMC
BEAZER HOMES	BZH	0.53	0.33	35.29%	Tuesday	AMC
CATASYS INC	CATS	-0.15	-0.78	-76.92%	Tuesday	AMC
CLEAN DIESEL	CDTI	-0.06	-0.31	71.43%	Tuesday	AMC
CARDIOME PHARMA	CRME	-0.16	-0.19	-44.44%	Tuesday	AMC
DIGITAL ALLY IN	DGLY	-0.26	-0.58	-70.83%	Tuesday	AMC
ESCO TECH INC	ESE	0.75	0.67	2.00%	Tuesday	AMC
EVOKE PHARMA	EVOK	-0.19	-0.24	-125.00%	Tuesday	AMC
FOAMIX PHARMA	FOMX	-0.44	-0.19	40.63%	Tuesday	AMC
INNOVUS PHARMA	INNV	N/A	-0.01	N/A	Tuesday	AMC
LIMBACH HOLDNGS	LMB	0.21	N/A	-9.09%	Tuesday	AMC
MAM SOFTWARE GP	MAMS	0.08	0.1	116.67%	Tuesday	AMC
MA-COM TECH SOL	MTSI	0.3	0.44	-5.66%	Tuesday	AMC
NOVABAY PHARMAC	NBY	-0.09	-0.34	8.33%	Tuesday	AMC
ONCOCYTE CORP	OCX	-0.13	-0.1	-8.33%	Tuesday	AMC
PARKERVISION	PRKR	-0.2	-0.12	N/A	Tuesday	AMC
REX ENERGY CORP	REXX	-1.18	-1.5	3.92%	Tuesday	AMC
RESHAPE LIFESCI	RSLS	N/A	-11.89	9.00%	Tuesday	AMC
SITO MOBILE LTD	SITO	-0.05	0.03	-200.00%	Tuesday	AMC
SIMULATION PLUS	SLP	0.05	0.05	18.18%	Tuesday	AMC
SORL AUTO PARTS	SORL	0.18	0.17	-6.06%	Tuesday	AMC
CHINA DIG TV	STVVY	N/A	-0.01	-27.27%	Tuesday	AMC
WESTPORT FUL-TS	T.WPT	-0.19	-0.18	9.33%	Tuesday	AMC
TSS INC	TSSI	N/A	0.01	200.00%	Tuesday	AMC
WESTPORT FUEL	WPRT	-0.15	-0.14	3.39%	Tuesday	AMC
YOGAWORKS INC	YOGA	-0.21	N/A	-5.71%	Tuesday	AMC
YIRENDAI LTD	YRD	0.78	0.85	-15.38%	Tuesday	AMC
TARGET CORP	TGT	0.85	1.04	-25.00%	Wednesday	BTO
ITURAN LOCATION	ITRN	N/A	0.39	N/A	Wednesday	BTO
JA SOLAR HOLDGS	JASO	0.18	0.15	250.00%	Wednesday	BTO
MERITOR INC	MTOR	0.47	0.34	45.45%	Wednesday	BTO
CHILDRENS PLACE	PLCE	2.46	2.29	14.67%	Wednesday	BTO
POINTER TELOCAT	PNTR	0.2	0.17	47.62%	Wednesday	BTO
SALLY BEAUTY CO	SBH	0.47	0.41	6.12%	Wednesday	BTO
SPIRE INC	SR	-0.29	-0.32	16.67%	Wednesday	BTO
TOP IMAGE SYS	TISA	-0.05	-0.02	1.19%	Wednesday	BTO
CISCO SYSTEMS	CSCO	0.55	0.55	0.00%	Wednesday	AMC
L BRANDS INC	LB	0.3	0.42	6.67%	Wednesday	AMC
NETAPP INC	NTAP	0.55	0.42	23.81%	Wednesday	AMC
AEGEAN MARINE	ANW	0.06	0.36	90.91%	Wednesday	AMC
EDAP TMS SA-ADR	EDAP	-0.02	-0.01	-150.00%	Wednesday	AMC
FIDELITY&GUARNT	FGL	0.65	0.69	0.00%	Wednesday	AMC
HILLENBRAND INC	HI	0.6	0.58	15.22%	Wednesday	AMC
NETEASE INC	NTES	2.66	3.11	-5.16%	Wednesday	AMC
SMART&FINAL STR	SFS	0.19	0.17	-25.00%	Wednesday	AMC
VERSAPAY CORP	V.VPY	-0.06	-0.03	5.26%	Wednesday	AMC
BEST BUY	BBY	0.79	0.62	9.52%	Thursday	BTO
HELMERICH&PAYNE	HP	-0.21	-0.33	41.94%	Thursday	BTO
SMUCKER JM	SJM	1.89	2.05	-6.21%	Thursday	BTO
WAL-MART STORES	WMT	0.97	0.98	100.00%	Thursday	BTO
BERRY GLOBL GRP	BERY	0.79	0.73	12.05%	Thursday	BTO
BRADY CORP CL A	BRC	0.48	0.44	4.35%	Thursday	BTO
BEST INC-ADR	BSTI	-0.09	N/A	N/A	Thursday	BTO
MANCHESTER UTD	MANU	-0.02	0.01	50.00%	Thursday	BTO
QIWI PLC-ADR	QIWI	0.24	0.29	26.09%	Thursday	BTO
SPECTRUM BRANDS	SPB	1.46	1.31	-10.94%	Thursday	BTO
SUBURB PROPANE	SPH	-0.9	-0.99	18.64%	Thursday	BTO
STAGE STORES	SSI	-0.71	-0.57	700.00%	Thursday	BTO
VIACOM INC-A	VIA	N/A	0.69	11.43%	Thursday	BTO
APPLD MATLS INC	AMAT	0.9	0.66	3.61%	Thursday	AMC
GAP INC	GPS	0.55	0.6	11.54%	Thursday	AMC
ROSS STORES	ROST	0.67	0.62	7.89%	Thursday	AMC
ASCENDIS PHARMA	ASND	-0.81	-0.8	-30.00%	Thursday	AMC
CORIUM INTRNTNL	CORI	-0.46	-0.42	-43.33%	Thursday	AMC
AMERICAS CAR-MT	CRMT	0.79	0.62	0.00%	Thursday	AMC
DESPEGAR.COM CP	DESP	0.14	N/A	N/A	Thursday	AMC
GLOBANT SA	GLOB	0.3	0.27	-61.54%	Thursday	AMC
LUXOFT HOLDING	LXFT	0.56	0.66	-48.28%	Thursday	AMC
MATTHEWS INTL-A	MATW	1.09	1.08	10.53%	Thursday	AMC
NATURAL GROCERS	NGVC	0.05	0.07	-75.00%	Thursday	AMC
POST HOLDINGS	POST	0.93	0.61	0.00%	Thursday	AMC
SHOE CARNIVAL	SCVL	0.63	0.54	14.29%	Thursday	AMC
SPLUNK INC	SPLK	-0.42	-0.67	15.38%	Thursday	AMC
SPORTSMANS WRHS	SPWH	0.24	0.25	12.82%	Thursday	AMC
WILLIAMS-SONOMA	WSM	0.84	0.79	350.00%	Thursday	AMC
FOOT LOCKER INC	FL	0.8	1.13	-31.11%	Friday	BTO
ABERCROMBIE	ANF	0.23	0.02	52.94%	Friday	BTO
BUCKLE INC	BKE	0.39	0.48	9.09%	Friday	BTO
DIANA CONTAINER	DCIX	-5.53	-99.99	44.39%	Friday	BTO
DESTINATION XL	DXLG	-0.09	-0.05	-40.00%	Friday	BTO
HIBBET SPORTS	HIBB	0.21	0.66	25.00%	Friday	BTO
FANG HOLDINGS	SFUN	0.03	-0.03	33.33%	Friday	BTO

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