A Closer Look at Retail Earnings

Q1 earnings for S&P 500 members that have reported are up 11.5% year-over-year on 4.3% higher revenues, though beat rates are below recent periods. Retail sector earnings are up 11.5%, but decline 5.2% excluding Amazon, with Target underperforming due to company-specific issues and shifting consumer spending, while Walmart thrives. Q2 earnings are expected to increase 5.5% on 3.8% higher revenues, but estimates have been revised downward for most sectors due to tariff uncertainty, though the Tech sector's revisions trend has stabilized.

Analysis

S&P 500 members (469 reported) demonstrated robust Q1 earnings growth of +11.5% year-over-year (YoY) on +4.3% higher revenues, although the proportion of companies beating EPS (74.2%) and revenue (62.5%) estimates trailed recent periods and 20-quarter averages. The Retail sector mirrored this overall earnings growth at +11.5% on +5% higher revenues for 96% of its S&P 500 constituents; however, excluding Amazon's significant contribution, the sector's earnings declined by -5.2%, and beat rates for both EPS (56%) and revenue (52%) were materially below historical averages. Within retail, Target (TGT) continued its post-COVID underperformance, missing lowered estimates and ceding market share, attributed to a merchandise mix heavily skewed towards discretionary items (roughly 20% essentials) and company-specific execution issues, contrasting with rivals like TJX. Conversely, Walmart (WMT) is excelling, driven by its essentials-centric model (approximately 60% of revenue), a burgeoning digital business, and successful expansion into high-margin areas such as advertising and third-party marketplace, attracting higher-income demographics. Looking ahead to Q2 2024, S&P 500 earnings are projected to rise +5.5% YoY on +3.8% revenue growth, but these estimates have seen significant downward revisions since the start of the quarter, largely due to tariff uncertainties stemming from April 2nd announcements. These cuts have impacted 15 of 16 Zacks sectors, with Transportation, Autos, Energy, Construction, and Basic Materials experiencing the largest declines; Aerospace is the sole sector with positive revisions. Notably, estimates for the Tech sector, a critical earnings contributor (nearly one-third of S&P 500 earnings), have stabilized after initial declines, with Q2 earnings now expected to grow +12.1% on +9.8% higher revenues. While near-term estimates face pressure, longer-term (2025) earnings projections remain largely unchanged, though macroeconomic uncertainty, particularly regarding tariffs, persists.

Key Decisions for Investors

• Investors should exercise caution with Target (TGT) due to its consistent underperformance, market share losses, and exposure to discretionary spending, while closely monitoring for any signs of strategic or operational turnaround.
• Consider Walmart's (WMT) relative strength, given its successful digital transformation, focus on essential goods, and growth in high-margin segments, which may offer resilience in the current economic climate.
• While the Tech sector's earnings estimates have stabilized, suggesting some resilience, remain vigilant regarding tariff developments as they pose a continued risk to this sector and the broader market.
• Given the widespread downward Q2 earnings revisions across most S&P 500 sectors, particularly those sensitive to tariffs, adopt a selective approach, scrutinizing company fundamentals and sector-specific headwinds before making new allocations.