Most major retailers have been able to overcome supply chain challenges and keep their shelves stocked. What this suggests is that when it comes to supply chain management, size matters.
That said, all major retailers have had to spend more to keep shelves stocked, with freight costs weighing heavily on margins and prospects. We saw it with Target TGT and Walmart (NYSE:) WMT, and even the mighty Amazon AMZN have had to deal with these issues. Both Walmart and Target exited the third quarter with higher-than-normal inventory to effectively manage the holidays.
We’ll discuss Walmart and Target in more detail later, but recap the retail sector’s third quarter earnings season dashboard.
With results from 29 of the 35 S&P 500 retailers already released, total earnings for those companies reporting are up +8% on revenue up +10.8%, at 86.2%. exceeding EPS and revenue estimates. Net margins for this group are down 14 basis points from the prior year level, due to the aforementioned headwinds. This would follow the 150 basis point expansion of the previous reporting cycle (Q2 2021).
For the entire S&P 500 index, Q3 net margins are up 230 basis points. The chart below puts Q3 retail sector earnings and revenue growth rates in historical context.
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Image source: Zacks Investment Research
The comparison charts below put the industry’s Q3 EPS and revenue overshoot percentages in historical context.
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Image source: Zacks Investment Research
While the proportion of these companies exceeding Q3 EPS and revenue estimates is lower than what we saw in the prior period, the exceedance percentages still track historical averages.
Going back to Walmart’s report, the stock fell slightly after the release, even though it did an impressive job of navigating the supply chain issue. Walmart’s US competitors grew by +9.9% in the third quarter, with Walmart US +9.2% and Sam’s Club +13.9%. Walmart’s third-quarter gross margin of 25.3% was down 20 basis points from the year-ago level. Walmart ended the third quarter with +11% more inventory than the previous year’s level.
Shares of Walmart have lagged the broader market and Target this year as the market has been concerned about the retail giant’s margin outlook amid inflation and supply chain issues. The title is down -0.9% this year against +26.4% gain for the S&P 500 index and the gain of +42.4% for Target.
The market loves Target’s digital offering that seamlessly integrates online into the company’s physical footprint. Target experienced strong growth, with comps up +12.7%, although gross margins were weaker than expected due to higher freight and supply chain spend. Target ended the quarter with +18% more inventory than the prior year, ensuring well-stocked shelves over the holidays.
Third Quarter Earnings Season Dashboard
Including all results published up to Friday 19 Novemberand, we now have third quarter results for 475 members of the S&P 500 or 95% of the total index members. The total profit (or aggregate net profit) of these companies is up +41.9% compared to the same period last year on revenues up +17.7%, with 79.7% beating the EPS estimates and 74.5% revenue estimates.
The proportion of these companies exceeding both EPS and revenue estimates is 62.7%, the percentage of mixed beats.
Earnings and revenue growth has slowed in the current third quarter earnings season from the breakneck speed of the first half, but it remains very high.
You can see that in the comparison charts below which show third quarter earnings and revenue growth for the 475 members of the S&P 500 that reported results through Friday, November 19.and.
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Image source: Zacks Investment Research
The unfavorable comparison with the first half of the year is not just about growth rates, as the proportion of these companies beating EPS and revenue estimates is also lower than what we had seen from this same group of companies. earlier in the year. , as you can see in the graphs below.
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Image source: Zacks Investment Research
Despite the slowing pace of growth, third-quarter aggregate earnings for the S&P 500 are on track to hit a new all-time quarterly record, surpassing the record set in the previous quarter. You can see that in the chart below which shows the overall Q3 2021 total at $477.8 billion.
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Image source: Zacks Investment Research
The only notable disconcerting development this earnings season has been in revisions, with estimates for the current period (Q4 2021) having fallen slightly in recent days after rising at the start of the reporting cycle.
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Image source: Zacks Investment Research
This contrasts with the persistent trend of positive revisions we have seen since the summer of 2020. Although the magnitude of the negative revisions to the fourth quarter estimates is quite modest overall, it is relatively more pronounced for the trade sectors of retail and transportation.
Estimates for the whole of 2022 continue to rise, although the trend in revisions has notably stabilized since the beginning of October. In fact, had it not been for the positive revisions to the Energy sector estimates, the overall Index estimates would have actually fallen since the start of the third quarter.
The graph below shows how the aggregate estimates for the whole of 2022 have evolved since the start of the year.
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Image source: Zacks Investment Research
Since early October, overall estimates have fallen for 10 of the 16 Zacks sectors and risen for four. The four sectors experiencing positive estimate revisions since early October are energy, automotive, basic materials and medical.
Positive earnings estimate revisions in the Energy sector were the most pronounced and helped offset negative revisions in a host of other sectors. The energy sector is expected to record the highest revenues in 2022 since 2012.
Expectations for the third quarter and beyond
Looking at the quarter as a whole, combining actual earnings reports with future company estimates, total third quarter earnings for the S&P 500 are expected to be up +40.3% from the same period last year. +17.2% increase in revenue.
The chart below shows earnings and revenue growth on a quarterly basis, with expectations for the third quarter of 2021 contrasting with actual growth achieved in the previous four quarters and estimates for the following three.
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Image source: Zacks Investment Research
The graph below shows the comparable picture on an annual basis.
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Image source: Zacks Investment Research
For a detailed overview of the overall earnings picture, including expectations for the periods ahead, please see our weekly Earnings Trends Report >>>> Margin Outlook Breakdown
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