U.S. retail sector momentum grows through the second quarter

Consumer spending comprises two-thirds of the nation’s gross domestic product (GDP) and when retailers do well, so does the overall economy. At least that was the case for the second quarter as Walmart, Target, Home Depot and other mass retailers posted second quarter performances that fueled a 5.7% spike in retail sales.

Debra Weinswig, analyst at Coresight Research, surveyed some of the biggest players in the retail industry through the quarters ending in June, July or August. She compiled a report for what she calls “Second Quarter Recap” for simplicity’s sake, even though the individual companies included in the report might be on a different fiscal calendar. She said results were for companies reporting earnings between June and the end of August.

“The apparel, footwear, luxury and specialty sectors were clear winners, with robust growth in sales. Buoyant consumer sentiment and new fashion trends have boosted growth of the formerly lackluster apparel market,” she noted.

After years of sluggish performance, Weinswig said U.S. apparel has experienced an uptick in demand in recent quarters which resulted in stronger top-line figures for some. Weinswig looked at 27 apparel retailers for the report and noted 21 of them beat consensus sales estimates for the second quarter and 16 of them beat earnings consensus estimates.

“The apparel and footwear companies on our list grew sales by 8.5% in the quarter, beating the consensus estimate of 5.9%. These companies’ EPS (earnings per share) also topped consensus, growing by 29.2% year over year versus analysts’ estimate of 16%. Some of the big winners in this retail sector were TJX Companies, VF Corporation, Burlington Stores, Foot Locker, Guess and Urban Outfitters,” Weinswig noted.

She said mass retailers in the report also performed well in the recent quarter. On average, the companies analyzed in the segment grew revenue by 7.2% year-over-year, beating the consensus estimate of 5.8%. Earnings grew 27.4%, ahead of the 22.2% forecast by Wall Street.

“Walmart posted its strongest same-store sales growth in more than a decade in the second quarter. Walmart’s revenues grew 3.8% and EPS increased 19.4%, each ahead of consensus estimates,” she said.

Weinswig also noted the grocery comp at Walmart was its best in nine years, led by strong fresh food sales. Tacking on 40% growth in e-commerce sales was also a good showing by Walmart who said it has expanded online grocery pickup to more than 1,800 locations. Grocery pickup success is helping fuel online sales growth for Walmart.com.

She said things are going well enough at Walmart for the company to spend nearly $17 billion to acquire Indian retail giant Flipkart. The Bentonville-based retailer also sold 80% of its business in Brazil and its Asda division partnered with Sainsbury in the United Kingdom to try and get a leg up on market share in the competitive country.

Target, which also is investing in store remodels, saw revenue grow 6.7% in the recent quarter, beating the 5.5% consensus estimate. Weinswig said same-store growth of 6.5% was the strongest comp for Target since 2005. Traffic in stores was also up 6%. Weinswig said a strong showing through the recent quarters prompted Walmart and Target to each raise their full-year earnings guidance.

Home improvement retailers sustained the trend of revenue growth as consumers continued to invest in their homes, Weinswig reported. Home Depot reported earnings per share of $3.05 in the second quarter, up from $2.25 for the prior-year-ago period. Earnings also beat the consensus estimate of $2.84. Home Depot increased revenues by 8.4% year over year. Sales revenue totaled $30.46 billion in the quarter. U.S. store comps rose 8.1% in the quarter. The retailer said lumber, indoor garden, outdoor garden and electrical category sales each outperformed expectations. Home Depot also raised its earnings guidance and revenue expectations following the strong quarter.

The report found growth at department stores Dillard’s, Macy’s, Kohl’s, JCPenney and Nordstrom to be a mixed bag. Kohl’s and Nordstrom posted healthy sales growth that beat analysts expectations and Dillard’s also had positive growth. Macy’s and JCPenney struggled in the quarter with declining sales. Macy’s sales were down 1.1% and JCPenney saw net sales drop 7.5% in the quarter. Four of the five retailers did exceed Wall Street expectations on earnings in the quarter, JCPenney did not.

Food retailer Kroger and the entire U.S. food retail sector has tended to grow only modestly over recent quarters, Weinswig noted. Kroger grew earnings by 5.1% year-over-year and forecast sales growth between 2-2.5% for the full-year. Kroger expanded its partnership with Instacart to increase delivery coverage to 75 new markets throughout the U.S. by late October.

“Food retail is largely influenced by food-price inflation, changing lifestyles and food choices. Kroger reported second-quarter net sales of $27.9 billion, up 1.1% year over year but slightly below the $28.0 billion consensus estimate,” Weinswig noted.

Weinswig said all retailers have been impacted by the rise of Amazon and the consumer’s increasing enthusiasm for online shopping. Amazon again posted strong quarterly numbers, aided by an increase in Prime memberships, growth in Echo device sales and increasing subscription revenues, she said.

Amazon reported second-quarter net sales of $52.9 billion, up 39.3% year over year but slightly below the $53.5 billion consensus estimate. Amazon Web Services, which accounts for more than 50% of the company’s operating profits, posted revenue growth of 48.9% year over year. For the third quarter, Amazon guided for revenues of $54–$57.5 billion, up 23%–31%.

Weinswig said the recent quarterly performances of retail companies indicate U.S. consumers are willing to spend and those purchases are boosting discretionary sectors.

“Consumers continue to show particular willingness to spend on their homes, and they appear to have returned to the apparel category following several years of lackluster growth in the category. With the U.S. economy on track, shoppers are expected to continue their shopping spree in the upcoming holiday quarter, although retailers will be up against demanding comparatives from the strong fourth quarter of 2017,” Weinswig said.

The National Retail Federation is calling for year-over-year sales increase between 4.3% to 4.8% this holiday season. Consumers are expected to spend spend between $717 billion and $720 billion, up from $688 billion last year. The trade group said the forecast reflects the overall strength of the retail industry, a healthy economy and strong consumer confidence.