Several consumer companies reported results over the past two weeks. After reviewing Q2 earnings reports and conference calls, I concluded consumer businesses were experiencing a slight slowdown. Since then, I’ve been paying close attention to consumer businesses and remain on the lookout for changing trends. Over the past few days, I’ve reviewed several consumer companies’ quarterly reports and conference calls and provided brief summaries below.
Ralph Lauren (RL) reported weak results, but its stock moved higher as it won the earnings estimate game (weak results were expected/restructuring). Total sales declined -4%. Wholesale segment revenues declined -5% mainly due to challenging traffic trends at U.S. department stores. Retail segment sales declined -3% and same store comps declined -7%. Management blamed lower traffic and a challenging economic environment. Interestingly, online sales declined -6%. Management noted it is “harmonizing” its pricing. The company is expecting revenue to decline low double digits in fiscal 2017 due to “a proactive pullback in inventory receipts, store closures, pricing harmonization and other quality of sales initiatives combined with the weak retail traffic and a highly promotional environment in the US.”
TJX Companies (TJX) reported solid results, but apparently lost at the future earnings estimate game, as its third quarter outlook was disappointing. Same-store sales were relatively strong in my opinion, up 4%. Management noted most of the comp increase was due to traffic, which is different than most consumer companies I’ve reviewed (traffic and transaction growth was weak last quarter, even for companies reporting positive comps). As operating results suggest, management believes they are gaining significant market share. All things considered, it looked like a good quarter to me. But what do I know — its stock actually declined on one of the better retail reports I’ve seen recently. At 22x 2017E earnings, I’m assuming part of the negative response may have been valuation based. Also while 4% comps are well above average for retailers, comps are slightly below last year’s average of 5%.
Dicks Sporting Goods (DKS) reported satisfactory results that the market seemed to like. While same store comps were up a moderate 2.8%, investors were relieved The Sports Authority liquidation appeared to have little impact. The exact impact is unknowable and we’ll have a much cleaner comp next quarter. On the conference call management noted sales actually benefited from the liquidations at the end of the quarter. Finally, on traffic, management said, “DICK’S Sporting Goods omnichannel same-store sales increased 3%, driven by a 1.3% increase in ticket and a 1.7% increase in traffic.“ Given the uncertainty regarding how competitor inventory liquidations impacted results, I don’t believe it’s a good idea to use Dicks’ operating results as a broader macroeconomic data point at this time.
Target Corp. (TGT) reported poor results and lost at the earnings game. I have not reviewed their conference call yet, but same store comps declined -1.1%. Same store comp expectations for the second half (where’s the second half recovery?) are 0% to down -2%. Once I read their conference call I’ll know more, but it appears to be simply general weakness.
The Home Depot (HD) reported solid results with 4.7% growth in same-store sales. Interestingly, a large portion of this increase was due to the average ticket growing 2.5% while transactions were up 2.2%. This is similar to what I’m seeing with most consumer companies reporting positive comps – a meaningful portion is coming from mix and price. According to management, “…big-ticket sales in the second quarter, transactions for tickets over $900, representing approximately 20% of our US sales, were up 8.1%. The drivers behind the increase in big-ticket purchases were HVAC, appliances and roofing.” In my opinion, relative to other retailers, Home Depot is benefiting more from asset inflation. Considering I believe asset inflation is unsustainable, I would argue Home Depot’s sales trends are at greater risk to The Great Normalization (when asset prices revert to fair value). Nonetheless, its current business is performing well and it was a solid quarter.
Lowe’s Cos. (LOW) results were slower than expected and it also lost at the earnings estimate game. Comparable sales were up 2% while U.S. based stores were up 1.9%. Average ticket was up 1.7% and transactions were only up 0.3%. Ticket size over $500 was up 2.9%, which is well below Home Depot’s high ticket size transaction growth. I would have expected Lowe’s to benefit more from asset inflation. Interestingly, in their quarterly slide presentation they note appliances performed only “average”. I haven’t read their conference call yet, but based on the press release and slides, it looks like a sluggish quarter given the macro benefits they should be experiencing.
In conclusion, after reviewing these quarterly reports and conference calls, I believe it’s difficult to draw a conclusion as it relates to changing consumer spending trends. Overall general merchandise appears weak, while consumer companies positioned closer to asset inflation, such as Home Depot, continue to perform better. However, when viewing business trends based on transaction growth, even the companies performing better are not reporting particularly strong results. Gains based on price and mix are beneficial, but I’d argue are more dependent on the sustainability of asset inflation and the consumer’s willingness and ability to pay more. Overall, I’d call these reports mixed and inconclusive – penalties offset, replay third down! As we get more data I’ll put it all together and try to determine if Q2 was a blip or something we should be more concerned about. Or more accurately, what investors in stocks should be concerned about. I remain out of equities entirely.