Why Retail Sector Woes Continue - Analyst Blog

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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 recent Earnings Trends piece:

"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 stage."

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 ( M ) recently reported earnings that showed the "best-in-class" retailer missing expectations on the bottom line. Wal-Mart ( WMT ) 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 ( AMZN ).

Promotional Environment

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 considered.

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 ( BBY ) and Target ( TGT ) 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 prices.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: M , WMT , AMZN , BBY , TGT

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