Shoppers at the Westfield Valley Fair shopping mall in Santa Clara, Calif..
Philip Pacheco/Bloomberg
It’s shaping up to be an important week for retailers as the biggest names in the industry get ready to report their third-quarter earnings.
The results should be good enough, but investors shouldn’t count on spectacular numbers. It’s a balancing act between slower sales growth and potential improvements in margins.
“You would expect things to just slow down some based on the fact that the prior couple of years have been above normal growth,” said Bobby Griffin, an analyst at Raymond James.
Inflation is also lower than it was this time last year, he said. While slower price growth is beneficial for consumer spending in the long run, it is likely to take a toll on retailers’ result in the short term, making it harder for companies to match or exceed the sales growth they have achieved recently.
Home Depot
(ticker: HD) kicks off earnings season Tuesday, followed by
Target
(TGT),
TJX Cos.
(TJX),
Walmart
(WMT), and
Macy’s
(M).
Wall Street is cautious about the sector. The consensus estimate for aggregate earnings per share for companies in the
SPDR S&P Retail ETF
(XRT) has fallen 2% since Sept. 29, according to FactSet. The retail exchange-traded fund is down 1% this year, while the
S&P 500
is 15% higher.
Sentiment is especially downbeat about companies that depend on discretionary spending. Investors are worried that big-picture challenges such as inflation, higher interest rates, and the resumption of payments on student loans may finally be hurting consumers’ spending power.
“Discretionary cracks started to broaden mid quarter,” Evercore ISI analyst Greg Melich noted. Purchases of big-ticket items, which are more sensitive to interest-rate increases, are under particular pressure.
These same concerns are weighing on the home-improvement sector, which has struggled for the better part of 2023. Shares of
Home Depot
are down 8% this year, while
Lowe’s
(LOW) is off 2%. Higher home prices and mortgage rates have discouraged people from moving and embarking on renovation projects.
Now that the industry is entering its off season, there are few signs this will change soon. Third-quarter earnings are unlikely to ease the market’s misgivings.
It isn’t all doom and gloom, however. Certain companies, particularly in the off-price and discount space, have benefited from the economic environment and could keep doing so this quarter, analysts say. Earnings estimates for companies like
Walmart,
TJX, and
Ross Stores
(ROST) have been slightly raised in the last few days, according to FactSet.
Foot traffic to discount stores increased 3.4% in the third quarter compared with the previous year, according to data from Placer.ai. The increase is especially striking given that overall retail foot traffic fell 2.8% in the quarter.
It’s worth noting that even though people seemed to be visiting retailers less in the third quarter, retail sales have still grown at a healthy pace for three consecutive months, bucking economists’ expectations. Sales are expected to have fallen in October, according to FactSet. The Census Bureau is scheduled to release October’s data on Wednesday.
Another silver lining is that freight and production costs are lower, meaning many retailers will likely improve gross margins and profitability.
“You can have a little bit less top line-sales [growth], but if you’re getting more favorable benefits from your supply chain, your earnings pressure might not be as much,” Griffin said.
The Street will likely react positively to any commentary about margin expansion, he added. But any updates on the outlook—including expectations for the holiday season—will likely move the needle most.
Write to Sabrina Escobar at [email protected]
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