As the Q2 earnings season winds down, most retailers who reported earnings this week surpassed estimates. Best Buy and GameStop β both in the computer & electronics retail space β strongly outperformed analysts’ earnings estimates, while JC Penney and Abercrombie & Fitch were both negative surprises.
This was the last week with a significant number of S&P 500 companies reporting second-quarter earnings results, and the focus was largely on retailers. All of the companies from the consumer discretionary sector reporting this week were retailers, and 67% of them exceeded their earnings estimates, which closely mirrors the index as a whole this earnings season. Two significant positive surprises, however, helped drive the earnings growth rate of the sector higher β to 9.1% from 8.5% a week ago.
Both of the companies that are part of the computer & electronics retail sub-industry posted earnings that more than doubled analyst expectations. Best Buy Co., Inc. (BBY.N) reported EPS of 32 cents, shocking analysts, who expected earnings of only 12 cents. The 32-cent-per-share profit represented growth of 23% over the year-ago earnings of 26 cents. Company management credited much of the improvement to cost-cutting initiatives and the completed rollout of the store-within-a-store areas that showcase products by Samsung and Microsoft. Similarly, GameStop Corp (GME.N) posted an earnings surprise largely due to cost cutting. GameStop’s 9-cent-per-share profit exceeded the 4-cent consensus, and management cited greater efficiency and well-timed share repurchases as factors that have allowed the company to improve EPS results in a shrinking market.
Home improvement retailer Lowe’s Companies Inc. (LOW.N) also posted a significant positive surprise this week, as it benefitted from the improved U.S. housing market. The 88-cent EPS result represents 35% growth over last year and was 11% higher than analyst estimates. Lowe’s CEO Robert Niblock shared his analysis of the housing market and outlook for the rest of the year during the earnings call. He explained, “The stronger-than-expected pace of home improvement industry growth so far this year was fed by modestly stronger gains in housing turnover and job growth than originally forecast, further offsetting the negative effects of higher taxes. The industry outlook for the second half hinges on the impact of steep increases in mortgage rates experienced over the last few months. The rate increases will likely take some steam out of the recent housing market rebounds, but shouldn’t derail it as long as job gains persist, homes continue to appreciate and rates rise more gradually going forward.”
While the majority of retailers reporting this week beat estimates, there were some negative surprises as well. Notable among these was JC Penney Company Inc. (JCP.N), which lost $1.17 per share after losing 37 cents a share a year ago. Analysts expected a loss of $1.06, but difficulties in driving traffic back to the store upon resuming a discount strategy and high inventories as a result of misjudging customers’ fashion preferences caused a disappointing earnings result.
Abercrombie & Fitch Co. (ANF.N) had the largest negative surprise this week, as it trailed the 28-cent estimate with earnings of 16 cents. Abercrombie also had a big miss on its same-store sales, as its reported SSS of -10% trailed the -4.1% estimate. The company blamed the miss on slow mall traffic, and said that teen apparel sales were especially weak. During the earnings call, the company also issued third-quarter EPS guidance between 40 and 45 cents, as compared with the analyst third-quarter estimate of $1.06.
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