Retail’s Earnings Are Here. What to Expect.

Walmart
and
Home Depot
will kick off the spate of big-box earnings reports on Tuesday, but the rest of America’s largest retailers, including
Lowe’s,

Costco Wholesale,

Target,
and
Macy’s,
will be sharing results into the first week of March.

By all accounts, the 2023 holiday season went better than most retailers and analysts feared. Retail sales were a little less than 4% higher than a year earlier for November and December. And while that marks a deceleration from the past three post-pandemic holiday seasons, it was still on the higher end of most industry watchers’ forecasts.

Within a few weeks into the new year, companies like
Abercrombie & Fitch,

Lululemon Athletica,
and
American Eagle Outfitters
lifted their fourth-quarter financial guidance. Many retailers that have already reported results—including
Crocs,

Estee Lauder,

Under Armour,

e.l.f Beauty,
and
Tapestry
—turned in better numbers than expected. Most of the reports still to come could be equally favorable, at least in terms of fourth-quarter performance.

”Heading into Q4 prints, we don’t expect many companies to report major earnings surprises,” wrote Jefferies analyst Corey Tarlowe in a note to clients.

Tarlowe believes value-oriented companies, such as
Walmart,

TJX Cos.
and
Burlington Stores,
are likely to post strong results as people looked to stretch their budgets over the holidays. Companies catering to higher-income customers whose brands are doing well—think Abercrombie and Lululemon—are also well positioned, analysts say.

That said, strong fourth-quarter results don’t guarantee a favorable market reaction. The problem is that the holiday’s gains appear “largely baked into” the sector’s stock prices, wrote Alex Straton, an analyst at Morgan Stanley.

That is especially true for companies headed into earnings season with high valuations — and even higher bars to clear in terms of investors’ expectations. Just look at what happened with
Shopify
: The e-commerce company barreled past expectations, but the shares still plummeted over concerns about management’s forecasts for free cash flow.

“More often than not, guidance for the next year overshadows the 4th quarter reports,” wrote D.A. Davidson analyst Michael Baker.

If January’s retail sales report is anything to go by, investors should start bracing themselves. Sales dropped 0.8% in January from December, a steeper decline than economists were forecasting. The data suggest consumers are finally pulling back on spending, which means that management teams are likely to err on the side of caution when issuing guidance, analysts say.

“This report paints a picture of consumer spending that is losing some of the momentum it has had over the last couple of years,” wrote Richard de Chazal, an analyst at William Blair.

Some subcategories in retail will reflect that slowdown more acutely than others. Home improvement retailers, for instance, have been grappling with slower sales for several quarters now, reflecting the sluggishness of the housing market.

Department stores could also be in a particularly tricky spot. Many companies that reported earnings earlier, including Under Armour,
Ralph Lauren,
and
VF Corp,
have flagged “significant declines” in U.S. wholesale demand, noted Rick Patel, analyst at Raymond James. Weak wholesale demand could mean retailers are holding back because they aren’t sure shoppers will keep buying.

Granted, financial guidance isn’t the only thing investors will be looking at this earnings season. Margin growth will also be important, Baker said. With most companies recovering from the “inventory debacle of 2022” and production and freight costs coming down, there is a good chance they will be operating more profitably, which would be well received by the markets even if sales growth weakens.

Write to Sabrina Escobar at [email protected]