Mixed Signals on Retail Earnings -- WSJ
November 19 2019 - 3:02AM
Dow Jones News
By Paul Vigna
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (November 19, 2019).
Retail earnings are in the spotlight this week, and some
analysts are confident that they will exceed expectations -- adding
to what's already been a strong year for the sector.
This week brings earnings reports from Home Depot Inc. and
Kohl's Corp. on Tuesday; Target Corp. on Wednesday; Macy's Inc. and
Nordstrom Inc. on Thursday; and others. Analysts, noting last
week's rosy report from Walmart Inc., and the government's October
retail-sales report, expect other retailers will outperform as
well.
"October retail sales showed acceleration," Nomura Instinet
analyst Michael Baker wrote in a note. In fact, he said, over the
last three full months the Commerce Department's numbers were the
best since the second quarter of 2018.
So far this year, investors have bought that narrative. The
S&P 500's consumer-staples and consumer-discretionary sectors
are both up about 22% in 2019, just short of the broader index's
25% gain. Target, Tiffany & Co., Best Buy Co., Home Depot and
Walmart are all up at least 25%.
But if Walmart is any indication, future share-price gains may
be harder to come by. Its shares initially jumped after its
earnings report, but fell thereafter. On Monday, they closed at
$120.25, a hair under Wednesday's $120.98 close just ahead of the
report. Walmart beat earnings expectations, but its 2.5% sales
increase was slightly under expectations.
There are also big decliners in retail this year. Kohl's is down
12%, Nordstrom has lost 19%, and Macy's is the worst performer in
the consumer discretionary sector, down 44%.
The question for investors at this point is which group -- the
big gainers or the big decliners -- better reflects the
economy.
Andrew Zatlin, who operates SouthBay Research in San Mateo,
Calif., sees signs consumer spending is faltering. Mr. Zatlin
maintains a measure he calls his "vice index," which tracks
spending on discretionary items including alcohol, gambling and
diamond sales.
He tracks state revenue boards to get a sense of how much people
are spending on gambling. In Detroit, Maryland, Connecticut,
Atlantic City and Pennsylvania, he has found, gambling revenue is
flat. Even Las Vegas is seeing no growth, he wrote in a note to
clients.
Another trend he examines is diamond sales, particularly what
size diamonds are selling best. If smaller diamonds aren't selling,
he says, that's a sign consumers are struggling. PriceScope, an
industry site that publishes diamond prices, says prices for
diamonds have been falling -- and those of one karat or less have
fallen sharply.
Prices "have absolutely collapsed the last few months," Mr.
Zatlin said, a sign that lower- and middle-income households are
cutting down or holding off on discretionary spending.
A worrying sign on a broader level is the monthly report on
freight shipments published by Cass Information Systems, which
showed an 11th consecutive monthly decline in October. The report
shows demand is down across all modes of transportation, both
domestically and internationally.
That report should be looked at as a leading indicator because
retailers must order goods before they can sell them. If they are
ordering less -- and that's what the Cass report ultimately shows
-- then they are going to be selling less down the line.
Write to Paul Vigna at paul.vigna@wsj.com
(END) Dow Jones Newswires
November 19, 2019 02:47 ET (07:47 GMT)
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