U.S. Retail/Restaurant 2025 Mid-Year Outlook

The LSEG Retail/Restaurant Index reported a blended earnings growth rate of 7.5% for Q1 2025, marking a significant deceleration after seven consecutive quarters of double-digit expansion. While 65.0% of companies exceeded analyst expectations, this beat rate is notably lower than the typical 71.5%, indicating a more challenging operating environment for the sector compared to historical performance.

Analysis

The LSEG Retail/Restaurant Index has entered a period of significant growth deceleration, with the blended earnings growth rate for Q1 2025 slowing to 7.5%. This marks a notable inflection point after seven consecutive quarters of double-digit expansion, signaling a potential shift in the sector's operating environment. While a majority of companies (65.0%) surpassed earnings forecasts, the quality of these results is questionable when compared to historical performance. This beat rate is considerably lower than the typical 71.5% observed in an average quarter, indicating that more companies are struggling to meet expectations. The higher-than-usual proportion of companies missing estimates (30%) further corroborates the theme of a more challenging landscape for consumer-facing businesses.

Key Decisions for Investors

• Given the clear deceleration in earnings growth and a lower-than-average beat rate, investors should adopt a more selective approach, moving away from broad sector exposure towards individual stock-picking.
• It is prudent to scrutinize companies that beat estimates to determine the quality of the earnings, as the overall trend suggests underlying weakness may be masked in headline figures.
• Monitor for an increase in negative pre-announcements or downward revisions to future guidance, as the current data suggests analyst expectations for the sector may still be too high.