Among the sectors within the S&P 500, Retail may wind up
underperforming worst this quarter. True, there are many retailers
still yet to report earnings (though we do have roughly
three-quarters of the entire sector's total market cap within the
S&P in the books at this time), but we've seen enough from the
sector thus far to understand what's happening in the space.
Whereas in the previous quarter it was simply enough to blame
bad "big-box" retail sales on foul winter weather, in Q2 that's now
a full season ago, and still we're seeing disappointing results
from some of the biggest names in the sector. Here's what Zacks
Director of Research Sheraz Mian had to say about this in his most
"Expectations were low to begin with and came down some more
as the quarter unfolded. But retailers have been struggling thus
far in Q2 to meet even these lowered estimates, with the EPS beat
ratios for the sector the lowest in the S&P 500 index at this
What's more: retailers have been consistently guiding lower for
Q3, regardless how well they performed in Q2 (or the company's
June/July quarter, whichever it may be). Macy's (
) recently reported earnings that showed the "best-in-class"
retailer missing expectations on the bottom line. Wal-Mart (
) beat its consensus earnings estimate. Both lowered guidance for
Q3, and their stocks have taken a hit as a result.
With an overall relatively strong Q2 earnings season across most
spaces in the S&P 500, what is it that's sandbagging the
retailers right now and for the near future? The reasons are
twofold, and I'd make the argument both are being caused, at least
in part, by just one company: Amazon (
Retail has existed within a highly promotional environment for
quite some time now: from consumers tenderly finding their way back
from the economic recession to holiday and back-to-school seasons
to "show-rooming" at a retailer with your smartphone, there always
appears to be a way to find what you are looking for at a cheaper
price. This has, of course, kept prices and thus margins down, with
a continued negative trajectory going forward.
Retailers have trained consumers to expect - and wait for -
special discounts and other deals on their merchandise. And then
being able to comparison-shop as a consumer for even better deals
than the promotions offer is helping spiral pressure against costs
for retail goods coming up.
Besides which, growth in U.S. household income hasn't kept pace
with many costs of goods, including raw materials used in making
all sorts of retail products. This keeps the consumer selective
about not only how much he or she is willing to pay for something,
but whether or not buying that thing at all is even being
Finally, one can clearly see Amazon.com's hand in manipulating
price points and hiving off market share from the big-box players
with promotions of its own. Plus, Amazon Prime's free shipping and
next-day delivery are closing the gap of the satisfying experience
one gets at a big-box retail store. And one less trip to the mall
is becoming increasingly attractive to many consumers, especially
at these completely competitive price points.
Shift to Online
Amazon's presence in the general retail market to the extent
that it is also draws in the eCommerce aspect of the Retail space.
Wal-Mart and Macy's still sell a small percentage of their
merchandise online - though that number is growing, and not just
the big-box companies but specialty retailers everywhere - and
migrating investment and energy into the eCommerce space can
literally be a dislocating experience for a company accustomed to
simply finding plenty of suburban square footage and filling their
shops with inventory.
Big-box retail in general may have seen its heyday already, in
any case. Where it was once the model for successful retail
investment, it has been dislodged by online shopping as well as the
"neighborhood convenience" model consumers who do still give
considerable foot-traffic are starting to prefer. And while big-box
players like Best Buy (
) and Target (
) are taking steps toward the emerging realities in the world of
retail, there's always plenty of slack and lack of momentum within
even well-conducted plans of action.
Macy's (Zacks Rank #3 [Hold]) is still up over 7 1/2%
year-to-date, but it's down 4.7% since its quarterly earnings miss
and lowered guidance. Wal-Mart (Zacks Rank #3) is down 6.3% since
the start of 2014, and Best Buy (Zacks Rank #3) has yet to recover
from its precipitous fall back in January of this year. Target's
(Zacks Rank #5 [Strong Sell]) struggles continue, down another 1%
today. And Amazon's (Zacks Rank #4 [Sell]) sell-off in the last
week of July has proven tough to bounce back from.
Thus, as the retail sector lags behind the rest of the sectors
of the S&P 500 on the quarterly earnings reports schedule, so
does it lag the overall index in performance, even with an economy
showing signs of growth - even robust growth in several areas.
Finding ways to offset the downward pricing spiral while navigating
toward the successful modern shopping experience will be two keys
for these retailers to finally see some bounce-back in their share
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