Retailers Gear Up to Report Fourth-Quarter Earnings Amidst Lingering Challenges
Walmart and Home Depot will kick off the spate of big-box earnings reports on Tuesday, as retailers prepare to unveil their fourth-quarter performances. With the holiday season now in the rearview mirror, companies will focus on highlighting their successes, while investors anxiously await news about the challenges that lie ahead.
Retail sales during the 2023 holiday season exceeded expectations, with November and December experiencing a nearly 4% increase from the previous year. Although this growth represents a slowdown compared to the past three holiday seasons, it still falls within the higher range of forecasts made by industry analysts. Abercrombie & Fitch, Lululemon Athletica, and American Eagle Outfitters have already raised their fourth-quarter financial guidance, setting a positive tone for the upcoming reports. Other companies, including Crocs, Estee Lauder, Under Armour, e.l.f Beauty, and Tapestry, have also surpassed expectations in their recent reports.
Looking ahead, value-oriented companies like Walmart, TJX Cos., and Burlington Stores are expected to post strong results, as consumers sought to stretch their budgets during the holiday season. Meanwhile, brands catering to higher-income customers, such as Abercrombie and Lululemon, are well-positioned in the market.
However, strong fourth-quarter results do not guarantee a favorable market reaction. The stock prices of many companies reflect the anticipated gains from the holiday season, leaving limited room for surprises. Investors remain cautious, as demonstrated by the recent decline in Shopify's shares, despite the company surpassing expectations. Concerns over management's forecasts for free cash flow overshadowed the positive results.
Furthermore, January's retail sales report indicates a potential slowdown in consumer spending. Sales dropped 0.8% in January compared to December, which was a steeper decline than economists had predicted. Analysts suggest that this trend may prompt management teams to approach their guidance with caution.
Certain subcategories within the retail industry may feel the effects of this slowdown more acutely. Home improvement retailers have been experiencing slower sales due to the sluggish housing market, while department stores face the challenge of declining U.S. wholesale demand. Retailers may be hesitant to make bold moves without assurance that consumers will continue spending.
Apart from financial guidance, investors will also focus on margin growth during this earnings season. With companies recovering from the inventory challenges of 2022 and production and freight costs stabilizing, increased profitability could compensate for any weaknesses in sales growth.
As the largest retailers, including Lowe's, Costco Wholesale, Target, and Macy's, prepare to release their earnings reports in the coming weeks, the industry awaits a thorough assessment of their fourth-quarter performances and insights into the challenges that may shape their future.
Analyst comment
Positive: Retailers had a successful holiday season with sales higher than expected. Many companies have already reported better-than-expected results. Value-oriented and higher-end retailers are well-positioned for strong results. Margin growth is expected as companies recover from inventory issues and production costs decrease.
Negative: The gains from the holiday season are already factored into stock prices, which may limit the market’s positive reaction to strong earnings reports. January’s retail sales data showed a decline, indicating a slowdown in consumer spending. Home improvement retailers and department stores may face challenges due to slower sales and weak wholesale demand.
Neutral: Strong fourth-quarter results do not guarantee a favorable market reaction. Companies may be cautious in issuing guidance due to the decline in consumer spending. Margins are expected to improve, which could offset weaker sales growth.
