Earnings Outlook: Retailers Will Dominate This Week

Summary

• Last week was mostly a slow leak lower for equities, as higher inflation reports squeezed out hopes for lower rates later this year.
• Still, investors remain hopeful as Nvidia sparked excitement with its bullish outlook on AI chips, if for only one day.
• Walmart expects increasingly stressed consumers and sliced its year ahead earnings forecast by 15% – a message that should be amplified this week as most other major retailers report, including Target, Costco, Macy’s, Dollar Tree and Best Buy.
• We expect equities to continue trending lower.

What We Learned Last Week

Last week was tough for inflation doves and those banking on the Federal Reserve (Fed) easing later this year. The Fed’s preferred inflation measure – Personal Consumption Expenditures (PCE) – was 5.4% YoY, up from 5% last month. Fed minutes and recent Fedspeak suggest that unless something changes, the Fed’s policy rate will be higher for longer. The S&P 500 (SPX) was down 2.7% on the week; the NASDAQ 100 (NDX) dropped 3.1%.

Yet on Thursday, the NDX managed to rally 1% on the strength of Nvidia’s (NVDA) earnings and comments about AI chips. Hopes that the tech sector mania will reassert itself are thriving. Never mind that AI is a minuscule corner of the tech market, with very few companies seriously active in this space. Granted, NVDA also pointed to a nascent pickup in gaming related activity, which could indicate a bottom is near in the consumer electronics sector. But little in earnings season has corroborated that view so far.

Walmart (WMT) projected earnings per share in the $5.90 – $6.05 range – a massive drop from the previous analyst consensus estimate of $6.51. WMT pointed to maxed out consumers who are increasingly allocating their dollars to groceries and away from higher margin consumer discretionary goods.

Similarly, Domino’s Pizza (DPZ) reported slowing sales as more people opt for home-cooked meals, which it believes is a multi-year trend.

Warner Brothers Discovery (WBD) offered mixed results, but tellingly reported that advertising revenue dropped 14%. There seems to be no visible bottom in this critical indicator of business sentiment. In a little-noticed action, National Public Radio in Washington laid off 10% of its staff due to a shortfall in advertising. To cite one data point, a source at a local NPR affiliate that was not affected by the layoffs said there is no indication of a recovery in advertising spend in coming quarters.

Overall, earnings continue to be mixed. Many companies are managing to beat expectations for revenue and earnings, and are offering tepid outlooks. Surely, many of those beats come from inflation and higher prices that analysts’ forecasts did not consider, as well as from cost savings like cutting back on advertising spend.

Companies in the travel/leisure sector continue posting solid earnings and robust outlooks, such as Caesar’s Entertainment (CZR) and Travel+Leisure (TNL). Any cracks here will prove that the consumer is tapped out.

We suspect the past week will be a template for markets going forward, with equities slowly leaking under the pressure of adverse economic releases and growing pessimism about the Fed. But there will be bright days too when another NVDA sparks renewed hopes.

The Week Ahead

Some 115 companies report next week, with the retail sector a key focus, including Target, Dollar Tree, Best Buy and Macy’s. We expect most – or more than most – sales gains will come from higher prices rather than increased volumes.

Tuesday

• Advanced Auto Parts (AAP) should be doing well as high auto prices incentives’ people to keep and maintain their older cars – but is it still struggling with inventory problems?
• AMC Entertainment will tell us if the desire to get out of the house includes going to the local cinema.
• Norwegian Cruise Line Holdings (NCLH) should confirm that cruises are a top choice for holidays in 2023.
• If WMT is struggling to sell inventory, then Target (TGT) may report some serious pain.

Wednesday

• Dollar Tree may report that more higher income consumers are ‘trading down’ to its lower cost goods.
• Salesforce and Snowflake could be in trouble – they are key players as many companies plan to upgrade technology – but they also control capital spending budgets.

Thursday

• Best Buy (BBY), Costco Wholesale Corporation (COST), Macy’s (M), and Nordstrom (JWN) will largely show how retailers are faring and where they are headed.
• Grocer giant Kroger (KR) may report whether consumers are switching from name brands to store brands, as well as how its mega-merger with Albertson’s (ABI) is progressing.
• Many luxury retailers are doing surprisingly well; Victoria’s Secret (VSCO) will reveal whether this includes less visible intimate wear.
• Dell Technology (DELL) is ground zero for current and prospective consumer demand for PCs.

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.

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(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.)