CHICAGO, Nov. 28, 2014 /PRNewswire/ -- Zacks.com releases the list of companies likely to issue earnings surprises. This week's list includes Wal-Mart (NYSE:WMT-Free Report), Target (NYSE:TGT-Free Report) and Macy's (NYSE:M-Free Report).
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Closing the Books on Q3 Earnings Season
The Retail sector dominates the reporting schedule at the end of each earnings season and that has been the case with the Q3 earnings season in recent days. The sector's performance has been subpar in absolute terms. But low expectations gave most retailers easy-to-beat hurdle rates.
The market's positive reaction to results from some of the key sector players like Wal-Mart (NYSE:WMT-Free Report), Target (NYSE:TGT-Free Report) and Macy's (NYSE:M-Free Report) appears more a function of low expectations than 'real' outperformance. The handful of these positive stock market reactions aside, the majority of retail sector company stocks have gone down in response to quarterly results. The Basic Materials sector is the only sector that has a bigger aggregate stock price pullback than the Retail Sector in response to the Q3 reports.
With results from 95.3% of the retailers in the S&P 500 index already, total earnings for the sector are up +2.4% on +5.3% higher revenues, with 65.9% beating consensus EPS estimates and 63.4% beating top-line estimates. This is roughly in-line with what we have been seeing from retailers in the recent past, as the chart below shows.
The chart also spotlights the sector's margin woes, a function of the extremely promotional environment that all industry players have been complaining about.
Q3 Earnings Scorecard (as of November 26th, 2014)
Including this morning's earnings announcements, we now have Q3 results from 493 S&P 500 members. Total earnings for these companies are up +6.8% from the same period last year on +4.0% higher revenues, with 71.1% beating EPS estimates and 58.4% coming out with positive revenue surprises.
The two charts below compare the Q3 growth rates and beat ratios for these 493 companies with what these same companies reported in 2014 Q2 and the 4-quarter average (through Q2).
As you can see, the earnings and revenue growth performance for these 493 companies (+6.8% for earnings and +4.0% for revenues) are below what we got from these same companies in Q2, but compare favorably to the respective 4-quarter averages. With respect to surprises, the earnings and revenue beat ratios are following divergent paths, with earnings surprises notably more widespread while revenue surprises a little hard to come by.
We continue to believe that the picture emerging from this reporting cycle is decent enough; it's not great, but it's not bad either. In terms of growth rates, beat ratios and guidance, it's a mixed bag when Q3 results are viewed in the context of other recent periods.
Some metrics are showing an improvement, such as a bigger ratio of companies is beating earnings estimates and the revenue growth rate appears to have picked up. But other metrics are showing weakness, such as the relatively lower earnings growth rate, the fewer positive revenue surprises, and the still-weak guidance picture.
The guidance picture is no different from what we have been seeing in recent quarters, with a majority of the companies providing guidance guiding lower. As a result, estimates for the current quarter (2014 Q4) are following the all-too-familiar pattern of sliding down, as the chart below clearly shows.
Keep in mind, however, that the magnitude of negative revisions trend for the current quarter is the highest we have seen in almost two years. We discuss this some more in the body of the report (on page 14), but the extent of revisions likely has one of two explanations – either estimates for Q4 have fallen more than they needed to or there is something negative going on with the business outlook. Notwithstanding all the global growth worries of the recent past, I will be skeptical of the second notion.
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