CHICAGO, Nov. 17, 2014 /PRNewswire/ -- Zacks.com releases the list of companies likely to issue earnings surprises. This week's list includes Home Depot ( NYSE:HD-Free Report), Target ( NYSE:TGT-Free Report), Gap ( NYSE:GPS-Free Report) and Wal-Mart ( NYSE:WMT-Free Report).
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Retail Sector Benefits from Low Expectations
The Q3 earnings season has come to an end for half of the 16 Zacks sectors in the S&P 500. Except for the Retail sector, most of the other sectors are close to the finish line as well. This week will bring results from more than 100 companies, including 24 S&P 500 members.
The Retail sector is heavily represented in this week's reports, with industry leaders like Home Depot ( NYSE:HD-Free Report), Target ( NYSE:TGT-Free Report) and Gap ( NYSE:GPS-Free Report) reporting Q3 results. The sector has been struggling on the earnings front in recent quarters and this reporting cycle has been no different. The heavily promotional environment has been forcing retailers to offer discounts to stay relevant even as they deal with the growing shift to online sales.
The big brick-and-mortar retailers have been trying to adjust to this shifting landscape. But as the online struggles of many prior industry leaders show, it isn't clear at this stage how the big-box business model will evolve as a result of these industry challenges.
Wal-Mart ( NYSE:WMT-Free Report), which came out with positive Q3 results on the back of first same-store sales growth in the home market, has been making good progress on its online presence. The company has been making aggressive investments in its online presence and that has started showing up in its results. Wal-Mart's online sales were up +21% in Q3, a solid performance but lower than the first-half 2014 growth pace of about +27%. The recent drop in gasoline prices has been beneficial to Wal-Mart's target market and will raise hopes for a better holiday season in that market segment.
On top of these industry-specific challenges are the issues facing consumers, who have yet to fully recover from the financial crisis. The labor market is no doubt improving and that has started to show up in measures of consumer confidence. But wage growth has been essentially stagnant, restricting households' buying power. The recent drop in gasoline prices should help this holiday season, but overall it has been a tough backdrop for retailers. No doubt the stock-price performance of the retail sector in the S&P 500 has been one of the weakest in the index – up a +6.6% vs. a gain of +10.6% for the index as a whole.
Sector Results Thus Far
With respect to the sector's performance thus far, total earnings for 27 Retail sector companies in the S&P 500 that have already reported Q3 results are up +1.6% on +5.8% higher revenues, with 70.4% beating earnings estimates and 63% coming ahead of top-line expectations. This is the second lowest earnings growth performance of all 16 sectors (Autos is the weakest) in the index. The earnings growth rate for the sector also doesn't compare favorably with what we have been seeing from the sector in other recent quarters.
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