The Big Winners (And Losers) Of Retail Earnings Season

As the results from the nation’s most prominent names in retail came rolling in for Q2, one could not help but think back to high school and recall what is probably the best-known start to a novel in the English language:  It was the best of times, it was the worst of times.

References to the works of Charles Dickens aside, for some retailers, and their investors the latest rounds of numbers were mostly in above expectations and on the incline — leading to victorious earrings calls and boosted stock prices. For others, particularly in the department store segment, the sledding was quite a bit rougher — a story told by declining share prices and a proliferation of think pieces about how many more rough rides through earnings some big brands can take.

Moreover, there was even an outlier or two — where the market’s reactions to the numbers they saw was perhaps a bit surprising.

The Winner’s Circle — And How They Got There 

If the retail earnings season had a big winner, it would likely be Target which beat analysts’ expectations across the board when it came to earnings, revenue, comparable sales and digital sales growth all came in ahead of analysts’ expectations pre-release and showed quarter-to-quarter and year-on-year growth.  Some of the growth slowed — digital sales increased by 35 percent in Q2, down from a 42 percent pick-up in Q1.

Target attributed most of its success to its now two-year-old turnaround project that has focused on renovating and remodeling physical stores and building fuller multi-channel experiences from consumers. Particular focus was paid to Target’s Shipt same-day grocery delivery service, and Target’s expanded buy online pick-up in-store capability.

“These options offer speed, convenience and reliability,” CEO Brian Cornell noted in his call with analysts. “And as a result, they’re quickly becoming the fulfillment choices for our guests. Also, most importantly, because these options leverage our existing in-store infrastructure, technology and teams, same-day fulfillment delivers outstanding financial performance as well.”

Target saw its share price skyrocket after the earnings release — bouncing up 19 percent, growth it has mostly managed to maintain in the subsequent days.

That is a bigger bounce than Target’s main rival — and one of retail’s other bigger winners during the great earnings rundown —  Walmart managed to pull off. Still, Walmart also managed to come out ahead of analysts’ predictions across the board, though by a somewhat less impressive margin than Target did.  The big story out of Walmart’s earnings was its expanding eCommerce purview — and the mounting strength of its digital grocery business.

“Customers are responding to the improvements we’re making, the productivity loop is working and we’re gaining market share,” CEO Doug McMillon said in a statement shortly after the results went public.

Walmart also confirmed it is pushing forward in its efforts to promote its digital grocery and one-day shipping programs. To date, 2,700 of its stores offer grocery pickup, while 1,100 offer same-day delivery. Walmart also confirmed that its one-day shopping options now reach 75 percent of the U.S. population. Walmart’s’ stock trended down immediately after the results were announced, mostly weighted down by gravity in the markets, but quickly rebounded.

Dick’s Sporting Goods was another powerhouse, with earnings and comparable sales both growing beyond what analysts were expecting out of it. It was also something of an anomaly in the retail earnings winners circle that tends to function as a mall anchor store that saw good results — more on that in a minute.

Rounding out the strong results circle were Lowe’s and Home Depot. The two home improvement mega-chains both easily surpassed analysts’ predictions for both earnings predictions. Lowe’s, however, ultimately made the better total showing, beating out analysts’ sales expectations where Home Depot missed and leaving its guidance for the rest of the year. Home Depot, noting worries about looming tariff woes, revised its estimates down. Both saw their share price rise on their earnings release — Home Depot by about 5 percent, Lowes by about 10 percent.

There is no silver bullet solution that held all the winners together — though some commonalities do apply. Most on the list have invested considerable time and talent into bolstering their digital and omnicommerce offerings, most are showing advancing skill in building that digital audience without cannibalizing their in-store shoppers (since all showed comparable sales growth of 3 percent or better)  and all but Dick’s are not associated with being typical mall brands — though Target is showing up as an anchor store more and more often as malls are working on rebranding.

So while there is no one single flaw that the entire sagging segment of retail together, there is some common ground.

The Losers Bench — And Getting Off Of It 

If one wanted to sum up the less performing end of the earnings spectrum with a single statement — it would probably be something to the effect of the following — it is a bad time to be a department store and a worse time to be a mall-based brand.

The number tells that story — for the first two fiscal quarters of this year, earnings at off-mall retailers rose 3 percent, compared with a drop of 29 percent for mall-based retailers, according to Retail Metric.

“There is an increasing polarization in retail,” said Neil Saunders, managing director at GlobalData Retail told the Associated Press. “It’s a vicious cycle, and it’s difficult to pull out of the tailspin.”

It is also a story that played out in all kinds of retail earnings reports over the last week. Kohl’s announced its third straight quarter of declining sales, alongside earnings that came in below analysts’ estimates and same-store sales that fell by nearly 3 percent. The best thing that J.C. Penney’s earnings report had information-wise was that its losses per share were less than what analysts were expecting, though its sales continued to drop more rapidly than market watchers had expected. A little over a year ago it seemed as though J.C. Penney might be able to pull off a turnaround — but its performance has been so dismal in 2019 that it is at risk of being delisted from the NYSE.

GAP Inc. attributed its miss on revenue and earnings to what its CEO Art Peck called a “challenging environment,” though he did affirm confidence in the brand’s future. That confidence comes despite falling earnings, falling sales and declining foot traffic to its stores and website. Even the Old Navy line — which is usually a source of strength, saw comparable sales fall by 5 percent. It could be worse, however — at namesake Gap stores, similar sales fell 7 percent.

The biggest retail loser — or at least the one that drew the most attention at any rate — was Macy’s. Analysts expected little of Macy’s in Q2 — and got less by the numbers — with Macy’s logging a big miss on earnings, a slight beat (but significant year-on-year decline in sales) and much explaining to do about its mounting inventory levels.

“Rising inventory levels became a challenge based on a combination of factors: a fashion miss in our key women’s sportswear private brands, slow sell-through of warm weather apparel and the accelerated decline in international tourism,” Macy’s Chairman and CEO Jeff Gennette said.

The report was not without bright spots — Macy’s noted that its business posted its fortieth consecutive quarter of double-digit digital growth (but did not attach a more specific figure to it than that). Macy’s Chief Financial Officer Paula Price also said during the call with analysts following the release that the company’s strategic initiatives are “on track to continue delivering sales growth” in the second half.

However, analysts were far from convinced — and Macy’s stock price took a 19 percent hit in after-hours trading. It is the latest in several years of hits. In 2015, Macy’s market capitalization rate was close to $25 billion; as of 2019, it had fallen to a little north of $5 billion.

The Earnings Big Picture 

There is always a proper grain of salt one should take on some earnings reports. Nordstrom, for example, reported earnings, revenue and foot traffic that are all falling sharply year-over-year; it has lower than expected sales in Q2 and logged growth in its digital business lower than 10 percent.

But it did report a sizable earnings beat — and great success in reducing its inventory levels, and its stock price shot up 19 percent.

Amazon, on the other hand, beat analysts sales estimates by around $1 billion — but it missed on earnings for the first time in four years and spent more than the $800 billion allotted for moving to one-day shipping, faced a rash of investor skepticism and saw its stock price drop.

A useful illustration of the fact that for all we learn from earnings reports — the reactions to them often have as much to do with how well they aligned with and analysts’ expectations, as opposed to how good or bad the news on paper objectively is.

Still has the first half of 2019 is now a closed book — and retail’s busy season is approaching in the second half, some things seem undeniably true.

Mall-based retailers need to find a way to get consumers back into malls — or themselves more quickly removed from them and selling in greener pastures, or perhaps more digital ones. It seems increasingly likely that some players are eventually going to lose their battle with gravity.

At the top of the scale, on the other hand, the race is getting faster, and the offerings are getting more advanced.  This means capturing the lead is hard — and keeping it is going to be harder.