Spending

Retail revenue breakdown that highlights slowing consumer spending

Not surprisingly, the combined weight of high inflation, rising interest rates and uncertainty surrounding the economy has forced consumers to change their consumption behavior.

The issue has undoubtedly been in play with low-income households for some time now. But we can intuitively understand that it won’t remain limited to just this consumer segment and will most likely move up the revenue chain in the days and weeks to come.

We saw some of this in the Walmart WMT report which showed that the retailer was benefiting from higher-income consumers “moving off” its stores in response to the aforementioned headwinds.

Retail is a tough and competitive space, even in “normal” times, and these are anything but normal times. They need the right amount of inventory, otherwise they will lose sales if they don’t have enough merchandise as they did at the start of the pandemic, or have to offer bigger discounts and hurt margins if they don’t. they have too many, as we saw with Walmart and Target TGT during the summer quarter.

Retailers also need to make sure they have the right kind of merchandise, as we’ve seen with Target and Walmart having too many things like patio furniture that consumers weren’t interested in buying after the initial boom. of the pandemic. Keeping stores fully staffed in a tight labor market and securing the right amount of price discounts are some of the other challenges big box operators like Walmart, Target and others face on a daily basis.

It all comes down to execution and effective management.

When it comes to the group’s third quarter earnings releases, the show has been mixed overall. Against a backdrop of moderation and changing consumer behavior, some retailers have fared better than others. Walmart was better, Target was not. Macy’s M, Foot Locker FL and Lowe’s LOW worked very well, but others didn’t.

You can see some of this in the year-to-date performance of Walmart (blue line), Target (green line) and Lowe’s (orange line) stocks versus the S&P 500 Index (red line).

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Image source: Zacks Investment Research

About the Retail Sector Third Quarter 2022 Earnings Season Dashboardwe now have results for 29 of the 34 retailers in the S&P 500 index.

Unlike the official S&P sector classifications which divide retail sector players into different sectors, primarily consumer discretionary, Zacks standalone retail sector classification which houses conventional retailers, digital players and restaurants allows for a more accurate understanding of trends in the space.

Third quarter total revenue for these retailers was down -5.5% from the same period last year, with revenue up +8.6%, with 72.4% beating estimates from the EPS and 58.6% revenue estimates.

The comparison charts below put the Q3 beat percentages for these retailers in historical context.

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As you can see above, retailers have struggled to come out with positive surprises so far, although this is a better performance than what we’ve seen from the 2022 Q2 group.

When it comes to earnings and revenue growth rates, Amazon’s weak numbers play a significant role in the industry’s year-over-year growth rate (Amazon is part of the Zacks Retail business, not of the Zacks Technology sector).

The two comparison charts below show third quarter earnings and revenue growth versus other recent periods, both with Amazon’s results (left chart) and without Amazon’s numbers ( right graph).

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Image source: Zacks Investment Research

Third Quarter Earnings Season Dashboard

Including all results obtained up to Friday 18 Novemberewe now have third quarter results for 476 members of the S&P 500 which, combined, represent 95.2% of the total members of the index.

For the 476 members of the index who have already published results, total revenue is up +1.8% compared to the same period last year on revenue up +11.8%, with 69.1% exceeding EPS estimates and 68.3% exceeding revenue estimates.

Here’s how these companies’ Q3 2022 earnings and revenue growth rates compare over different time periods.

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Here’s how Q3 2022 EPS and revenue overshoot percentages for these companies compare over different time periods.

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Image source: Zacks Investment Research

EPS and revenue percentages are lower than what we’ve seen from this same group of companies in recent quarters, but otherwise within the historical range now.

Tracking revisions to revenue estimates

The chart below shows the combined earnings and revenue growth for the third quarter of 2022 compared to what we have seen in the previous four quarters and what is expected over the next three periods.

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Zacks Investment Research

Image source: Zacks Investment Research

This is no surprise, as the global economy experiences a synchronized downturn, under the combined effects of rising interest rates in response to inflationary pressures, persistent logistical challenges that have begun to ease, and China’s persistent zero-Covid restrictions.

The orange bars in the chart above represent revenue growth. Thus, for the third quarter of 2022, revenues are expected to grow by +11.6% compared to the same period last year, even if profits are only expected to increase by +1.6%. This seemingly high revenue growth is a direct function of pricing power, with firms able to pass on rising input costs to end consumers. We intuitively know that this cannot last forever and the current projections for the next three quarters confirm this intuition.

The chart above shows that earnings for the current period (Q4 2022) are expected to be down -5.1% from the prior year level on revenue up +4.6%.

Estimates have steadily fallen, consistent with the trend we saw before the start of the third quarter earnings season.

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Estimates for the full year 2023 have also declined, with the negative trend in revisions being particularly notable on a non-energy basis. You can see this in the graph below which shows the overall earnings estimate for 2023 on a non-energy basis.

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Image source: Zacks Investment Research

Since mid-April, 2023 earnings estimates overall have fallen -8.6% for the S&P 500 index as a whole and -11.5% excluding energy.

The declines in estimates were particularly notable for Tech (-18.9% since mid-April), Construction (-25.1%), Distribution (-18.6%), Industrials (-14 .3%), Consumer Discretionary (-19.3%) and Aerospace (-13.4%). Overall, estimates have been reduced for 13 of the 16 Zacks sectors.

The chart below shows the overall profit picture on a yearly basis.

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Zacks Investment Research

Image source: Zacks Investment Research

Some in the market believe that 2023 earnings should be below the 2022 level instead of the currently expected growth of +2.8% simply because the US economy is expected to go through a moderate recession.

I’m not saying 2023 revenues can’t be lower than 2022 levels; they may be, and based on the current revision trend, they’re probably headed there. But it is wrong to expect that moderate declines in “real” GDP will automatically lead to lower “nominal” or non-inflation-adjusted corporate profits. Business revenues and profits are “nominal” values ​​and will reflect the effects of inflation. Inflation is expected to decline in 2023, but still remain positive.

For a detailed look at the overall earnings picture, including expectations for future periods, please see our weekly earnings trends report. >>>>Assess other downside risks to earnings estimates

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Macy’s, Inc. (M): Free Stock Analysis Report

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