Earnings Outlook: Are Big-Box Retailers Positioned for 2H?

Summary

• 2Q earnings season is ending. 90% of companies have reported, and about 30 are due this week.
• The big draw will be several major and specialty retailers, including general merchandisers Walmart and Target and hardware chains Home Depot and Lowe’s.
• Big tech will be in the news too, with Cisco and Analog Devices providing updates on the semiconductor sector and industrial demand for tech equipment.
• Bellwether Deere & Co. reports on Friday if farmers have been buying new equipment.

Quick Wrap…

About 90% of the S&P 500 (SPX) and Russell 1000 (RIY) have now reported 2Q earnings. Sales beats are running about 3%; EPS beats are 4.4% for SPX and 3.8% for RIY. The biggest winners are energy (+11.4%) and consumer discretionary (+10.9%) thanks to low expectations and strong earnings by many companies exposed to the reopening and summer travel.

What We Learned Last Week

Fox Corp (FOX) registered surprisingly strong advertising results – apparently largely because of heavy political advertising. That is a reminder: media companies that took a hit on advertising – especially digital – may catch a break in 2H as contentious midterm elections approach in early November.

Walt Disney Co. (DIS) posted better-than-expected subscriber growth. It also essentially confirmed the path forward for streaming is not subscriber growth but higher pricing and adding ad-supported tiers to their offerings. DIS and Netflix equities were up 12% and 7%, respectively, on the week.

In the consumer discretionary sector, one exception to the generally positive stories from companies exposed to the reopening was amusement park operator Six Flags (SIX). It missed on sales by 16% and EPS by more than 50%. Attendance was down 35% relative to 2019. SIX has pursued a strategy of significantly increasing pricing to weed out ‘Walmart’ shoppers and attract more ‘Target’ shoppers. At least half the strategy worked…

We continue to see a generally good tone in the market and earnings. However, when companies report disappointing earnings or outlooks, their equities tend to be hit hard, implying markets are mostly pricing in positive outlooks and good news for 2H.

Next Week

A bumper crop of retailers report in the coming week, including Walmart (WMT) and Target (TGT). Both issued warnings in July about rising inventories. The earnings flow slows a lot – to about 30 companies.

Tuesday

• We expect WMT and TGT (reports Wednesday) have moved quickly to clear excess inventory, which will hurt 2Q earnings. Will they report they are better positioned regarding merchandise for 2H?
• Home Depot (HD) and Lowe’s (LOW, reports Wednesday) will be feeling the effects of the housing slowdown as contractors withdraw. But a silver lining could be DIY shoppers, who may be reacting to inflation by taking on home improvement projects themselves.

Wednesday

• Tech companies exposed to consumers have been hurting in the current season; Cisco Systems (CSCO) and Analog Devices Inc (ADI) will give updates on demand from more industrial customers and whether semiconductor shortages are easing.
• Other tech companies reporting include Keysight Tech (KEYS), Synopsis (SNPS) and Wolfspeed Inc (WOLF).

Thursday

• Big box retailer Kohl’s (KSS) reports; are they running into inventory problems too?
• Several specialty retailers report, including Ross Stores (ROSS) and Tapestry Inc (TPR). In 1Q they were nimbler than larger retail chains, sidestepping supply-chain inventory issues. We may see if that was more luck than good management with 2Q reports.

Friday

• The one to watch is Deere & Co. (DE), which makes and sells farm equipment globally and serves as a global bellwether. Given extreme weather, the Russian/Ukraine war, and costly fertilizer, are farmers upgrading their machinery?
• Madison Square Garden Sports Corp (MSGS) will offer another read on how people are spending time and money as we put Covid restrictions behind us.

Over a 30-year career as a sell side analyst, John covered the structured finance and credit markets before serving as a corporate market strategist. In recent years, he has moved into a global strategist role.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)