Wal-Mart, Macy's, Target, Dollar Tree and Nordstrom are part of Zacks Earnings Preview:
CHICAGO, Aug. 19, 2013 /PRNewswire/ -- Zacks.com releases the list of companies likely to issue earnings surprises. This week's list includes Wal-Mart (NYSE: WMT-Free Report), Macy's (NYSE: M-Free Report), Target (NYSE: TGT-Free Report), Dollar Tree (Nasdaq: DLTR-Free Report) and Nordstrom (NYSE: JWN-Free Report).
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Retail Earnings Still in the Spotlight
The Q2 earnings season is effectively over, with results from 465 S&P 500 companies, accounting for almost 95.6% of the index's total market capitalization, already out (as of Friday, August 16th). The earnings season has ended for 9 of the 16 Zacks sectors, including Finance, Energy, Basic Materials, and Utilities.
Retail is the only sector that has a large number of reports still due, with 18 of the remaining 35 S&P 500 companies from the sector. But having seen Q2 results from such sectors bellwethers as Wal-Mart (NYSE: WMT-Free Report) and Macy's (NYSE: M-Free Report), we probably have a good enough sense of what to expect from the remaining Retail sector reports. The sector is heavily represented in this week's small line-up of earnings releases, with 32 of the week's 94 reports from the Retail Sector. By the end of this week, we will have seen Q2 results from 487 S&P 500 members.
Wal-Mart's soft outlook for the second half of the year is a material negative signal for the sector's outlook. After all, Wal-Mart alone accounts for almost 22% of the sector's total earnings. Target (NYSE: TGT-Free Report) and Dollar Tree (Nasdaq: DLTR-Free Report) reporting this week will likely not do any better, but the Wal-Mart news has brought down expectations for these and other discounters. The sector's problems aren't restricted to the lower-priced end alone as the weak guidance from Macy's and Nordstrom (NYSE: JWN-Free Report) show.
Total earnings for the 30 S&P 500 members from the Retail sector (out of 48 retailers) that have already reported are up +7.8% on +3.9% higher revenues. The earnings beat ratio has been 53.3%, while 40% of the retailers have come ahead of revenue expectations. The earnings and revenue growth rates for these 30 companies are roughly in-line with what we saw from this group in Q1 and other recent quarters, though the earnings beat ratio is clearly on the weak side. The 53.3% earnings beat ratio for these 30 companies compares to 63.3% in Q1 and the 4-quarter of 64.2% for the same group of companies.
The Q2 Earnings Scorecard
Total earnings for the 465 S&P 500 companies that have reported results already are up +2.7%, with 66% beating earnings expectations and a median surprise of +2.9%. Most of this growth has come from top-line gains, with total revenues for these 465 companies up +2% and 52.7% beating revenue expectations.
The earnings growth rate of +2.7% compares to +2.4% earnings growth rate in Q1 and the 4-quarter average growth pace of +2.9% for the same set of 465 companies. The earnings beat ratio, which was tracking a bit lower earlier in the reporting cycle, has caught on with historical levels. On the revenue side, the growth of +2% compares to +1.8% in Q1 and the 4-quarter average of +2.9% for this group of 465 S&P 500 companies. The revenue beat ratio of 52.7%, however, is decidedly better than what we saw in Q1 (41.9%) and the 4-quarter average (45.5%).
Strong results from the Finance sector are playing a big role in giving respectability to the aggregate Q2 data. It is very hard to be satisfied with the picture once Finance is excluded from the numbers. With all of the Finance sector's results already in, total earnings for the sector are up +30% on +8.5% higher revenues, with beat ratios of 76.9% for earnings and 65.4% for revenues. Finance's performance has been way better than what we have seen from the group in recent quarters.
Strip out Finance and total earnings growth for the S&P 500 turns negative – down -3%. This is weaker than what these same companies reported in Q1. Weakness in the Technology sector spotlights the broad growth challenge outside of Finance, though Basic Materials (total earnings down -11.1%) and Energy (-12.7%) also played roles.
The composite Q2 growth rate, where we combine the results for the 465 that have come out with the 35 still to come, is for +2.6% total earnings growth on +2% higher revenues. Excluding Finance, the composite earnings growth rate drops to a decline of -2.8%. Bottom line, the earnings picture outside of Finance is very weak.
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Since 1988, the Zacks Rank has proven that "Earnings estimate revisions are the most powerful force impacting stock prices." Since inception in 1988, #1 Rank stocks have generated an average annual return of +28%. During the 2000-2002 bear market, Zacks #1 Rank stocks gained +43.8%, while the S&P 500 tumbled -37.6%. Also note that the Zacks Rank system has just as many Strong Sell recommendations (Rank #5) as Strong Buy recommendations (Rank #1). Since 1988, Zacks Rank #5 stocks have significantly underperformed the S&P 500 (+3% versus +10%). Thus, the Zacks Rank system allows investors to truly manage portfolio trading effectively.
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