This has been a big week for retail earnings. Several companies have reported, and in doing so, have filled out the picture of retail in general. On the surface, that picture is chaotic, but, as with the best abstract art, a longer and closer look reveals a theme, if not an actual pattern.
The headliner this morning is Best Buy (BBY), which handily beat bottom line expectations, earning $1.02 per share versus estimates for around $0.90. Victoria’s Secret parent L Brands (LB) also reported a solid beat yesterday, as did Target (TGT).
It hasn’t been all good news, however. Lowes (LOW) got smacked after missing consensus estimates for EPS and, much more worryingly, cutting their outlook for 2019 to well below what was expected. Home Depot (HD) did a little better, beating on earnings, but they too cut their guidance and that stock also got hit, while Kohls (KSS)’s miss resulted in a drop of around fifteen percent in that stock.
As you can see, there is no consistency there, nor was there any in relation to other recent quarters. Kohl’s, for example, missed after meeting or beating expectations in each of the three previous quarters, while Target’s beat followed a couple of misses. The best phrase to describe retail earnings at this point is “all over the place” but that is not necessarily bad news for the sector.
If you dig into what we have seen thus far, the success stories are generally down to one of two things. Either they come from specialist stores such as Victoria’s Secret and Best Buy, or they come from companies who have expanded their online operations significantly, such as Target and Walmart (WMT).
Companies operating on a more conventional department store or big box format, however, such as Kohl’s, JC Penney (JCP) and Nordstrom (JWN) did less well. Not even that fully explains retail earnings this quarter, though. Macy’s (M) lost a little ground on a mixed report last week but has since recovered. Their EPS beat is presumably being given more weight than the slight revenue miss, so not every department store is to be avoided.
Some have concluded that the negative results are about the decline of malls, but if that were the case, what explains L Brands’ success, or Lowes’ and Home Depot’s misses?
The net effect of all this on the sector has been negative, as you can see from the above chart for the retail sector ETF, XRT. What Q1 retail results have shown more than anything though is that there is not currently one retail sector, nor is it as simple as looking at two.
The online and brick and mortar divide still exists to some extent, but the line between the two is becoming blurred. The fact is, there are no discernible trends in retail, and investors who wish to be successful will just have to do the hard work of looking at each company separately.
That, however, is good news. It means that there are paths to success. Target managed to reinvent itself enough to turn the perception of its stock around, so why can’t Kohl’s? Best Buy is succeeding as a specialist retailer in a competitive market, so why can’t others?
What we are seeing in retail is simply capitalism in action: the efficient and the innovative are squeezing out those less well adapted. That is as it should be, and is actually quite reassuring.