The first quarter earnings season is almost over (91% of companies have reported) and the results, while not quite as dire as forecast just over a month ago, still led to the worst quarterly report since the financial crisis, mostly due to a widely expected collapse in energy revenues and earnings, however the big surprise was the disappointing misses in numerous consumer and retail stocks, the result of which was a plunge in the retail index…
… even though on Friday the US government reported that April retail sales that were supposedly the strongest in 13 months. The government data was so “good” in fact that even establishment economists such as Stephanie Pomboy of Macromavens did what we have repeatedly done in the past few months when she accused the government of fabricating the reported number by using a major seasonal adjustment gimmick as shown in the video below.
In the coming week, we will see the last batch of corporate reports, mostly out of retail stocks, as 12 of the 21 companies in the index scheduled to report earnings next week are retailers.
A quick glimpse at the woeful retail sector which is shaping up to be a continued story of improving internet retailers offset by deteriorating bricks and mortar outlets: of the 13 retail sub-industries in the S&P 500, eight have reported or are expected to report earnings growth, led by the Internet Retail sub-industry. Five of the retail sub-industries have reported or are expected to report a year-over-year decline in earnings, led by the Department Stores sub-industry. The Internet Retail sub-industry reported the highest earnings growth of all 13 retail sub-industries at 143.1%. Four of the five companies in this sub-industry reported earnings growth for the quarter, led by Amazon.com ($1.07 vs. -$0.12)
Some more details on the retail sector bifurcation from Factset:
The Home Improvement Retail sub-industry is projected to report the second highest earnings growth at 12.2%. Both companies in this sub-industry are predicted to report double-digit growth in EPS for the quarter. The mean EPS estimate for Home Depot for Q1 is $1.35, compared to year-ago EPS of $1.16. The mean EPS estimate for Lowe’s Companies for Q1 is $0.85, compared to year-ago EPS of $0.70. Home Depot is scheduled to release results on May 17, while Lowe’s Companies is scheduled to release results on May 18.
On the other hand, the Department Stores sub-industry reported the largest year-over-year decline in earnings of all 13 retail sub-industries at -47.8%. All three companies in this sub-industry reported a year-over-year decline in EPS of more than 25% for the quarter: Macy’s ($0.40 vs. $0.56), Kohl’s ($0.31 vs. $0.63), and Nordstrom ($0.29 vs. $0.66).
The Hypermarkets & Super Centers sub-industry is projected to report the second highest year-over-year decline in earnings of all 13 retail sub-industries at -14.1%. In this sub-industry, Costco has already reported results for Q1, while Wal-Mart Stores has yet to report results. The mean EPS estimate for Wal-Mart Stores is $0.88, compared to year-ago EPS of $1.03. Wal-Mart Stores is scheduled to release results on May 19.
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So with Q1 now mostly in the history books, here is a detailed breakdown of where we stand according to Factset: with 91% of the companies in the S&P 500 reporting actual results for Q1 to date, the percentage of companies reporting actual EPS above estimates (71%) is above the 5-year average, while the percentage of companies reporting sales above estimates (53%) is below the 5-year average. In aggregate, companies are reporting earnings that are 4.1% above the estimates. This percentage is slightly below the 5-year average (+4.2%).
The first quarter marked the first time the index has seen four consecutive quarters of year-over-year declines in earnings since Q4 2008 through Q3 2009. It also marked the largest year-over-year decline in earnings since Q3 2009 (-15.7%).
The blended (combines actual results for companies that have reported and estimated results for companies yet to report) year-over-year earnings decline for Q1 2016 is -7.1%, which is smaller than the expected earnings decline of -8.8% at the end of the quarter (March 31). Six sectors have reported or are reporting a year-over-year decline in earnings, led by the Energy, Materials, and Financials sectors. One sector (Consumer Staples) is reporting flat (0%) earnings relative to the year-ago quarter. Three sectors have reported or are reporting year-over-year growth in earnings, led by the Consumer Discretionary and Telecom Services sectors.
The blended sales decline for Q1 2016 is -1.7%, which is larger the estimated sales decline of -1.0% at the end of the quarter (March 31). Four sectors have reported or are reporting year-over-year growth in revenues, led by the Telecom Services and Health Care sectors. One sector (Financials) is reporting flat (0%) revenues relative to the year-ago quarter. Five sectors have reported or are reporting a year-over-year decline in revenues, led by the Energy, Utilities, and Materials sectors.
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And as attention turns toward the second quarter, this is what companies expect as of this moment: at this point in time, 83 companies in the index have issued EPS guidance for Q2 2016. Of these 83 companies, 58 have issued negative EPS guidance and 25 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 70% (58 out of 83), which is below the 5-year average of 73%.
In terms of earnings, the estimated decline for Q2 2016 is -4.6%, while the estimated growth rates for Q3 2016 and Q4 2016 are 1.4% and 7.5%. For revenues, the estimated decline for Q2 2016 is -1.3%, while the estimated growth rates for Q3 2016 and Q4 2016 are 1.8% and 4.6%.
What this means is that while Q1 earnings season may have come out slightly better than expected 45 days ago, it was at the expense of the second quarter, where overall EPS are now expected to drop 4.6% compared to “only” a 2.8% drop as of March 31, more than compensating for the 1.7% pick up in Q1 EPS net of upside surprises. Also, with many starting to focus on peak margins, the fact that sales are expected to decline 1.3% in Q2 (compared to a -0.6% expected decline as of Marc 31) likely means that earnings will be reduced further in the coming months.
It also means that absent a dramatic change, Q2 will be the fifth consecutive quarter in which earnings are set to decline year-over-year, another flashback to the recessionary days of 2008-2009.
The ongoing deterioration in sales and profits is shown best on the two charts below.
We will track when consensus for full year 2016 results shifts from positive to negative EPS growth. We expect that will take place in the coming several weeks months.
Also keep in mind that all of the numbers shown above are on a non-GAAP basis. The GAAP numbers continue to deteriorate at a much faster pace than their pro-forma, adjusted equivalents. According to I/B/E/S data, Q1 GAAP EPS were essentially unchanged from last year at $22.00 (compared to 27 for non-GAAP) which means that on an LTM GAAP vs non-GAAP basis, S&P500 EPS were 88.6, or about 23x LTM P/E compared to 17.5x for the non-GAAP P/E multiple.
In conclusion, the ongoing contraction in both sales and earnings in Q1, now forecast to continue into Q2, means that after a drop in 2015 earnings, the consensus estimates for a 0.9% increase in full year EPS (cut in half from March 31) and 1.5% in revenues, will both be slashed over the coming months, and will almost certainly result in yet another full year of declining top and bottom line corporate results, leaving margin expansion (and stock buybacks) as the only means for future stock market upside.
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