Chipotle,
Marriott,
and other consumer discretionary stocks soared after their first quarter results dazzled investors this earnings season, but the big gains may be over in the near term.
Companies in the sector—which includes restaurants, hotels, retail stores, and consumer brands people buy more of when they feel confident in their finances—overwhelmingly beat earnings expectations.
Aggregate sales for the sector beat analyst’s estimates by just over 3%, according to Evercore. Earnings per share beat by about 24%. Since bottom line figures beat expectations by a larger percentage than top-line results means these companies’ profit margins came in higher than forecast on average.
None of this is necessarily a surprise. In the several months leading up to first quarter reports, many of the firms saw analysts cut profit estimates, setting a lower bar for companies to surpass Wall Street’s projections.
Nonetheless, consumer stocks performed relatively well after earnings reports. The average stock price movement on the trading day after earnings was up 0.2% for the sector. That may not sound like a great result—and in the past it has been better—but it was certainly better than stocks in other sectors.
The average
S&P 500
stock fell a touch after earnings. Across sectors, there have been subdued share price reactions to earnings because many stocks rallied for months ahead of the reports, so the market was reflecting large earnings streams to come. That means companies needed to beat estimates by a lot—not just a little—to move stocks higher. Consumer discretionary companies’ strong reports helped their shares hang in there nicely after profit figures were released.
Chipotle Mexican Grill
(ticker: CMG) is an example. Sales grew to $2.37 billion, higher than analyst estimates of $2.34 billion. Store count and same-store sales both grew, as everything went well in the quarter. More people came through the doors and ordered on the app, the company said, while order sizes also increased, partially driven by higher prices. Food costs such as avocados declined, helping profit margins rise year over year—and beat expectations. That helped power earnings per share to $10.50, versus estimates of $8.95.
The stock rose about 13% the trading day after earnings, April 26, but has since flatlined.
Marriott International (MAR) is another example. Sales grew to $5.62 billion, versus estimates of $5.45 billion. A key driver was the higher average daily rate of rooms, the company said, while international markets saw a strong recovery. That helped drive profit margins up year over year, for a better-than-expected result, even as certain costs rose aggressively. Earnings per share, therefore, came in at $2.05, better than projections of $1.85.
The stock gained about 5% the day after earnings, May 2, but has dropped a tick since then.
Now that earnings season is over, these stocks face challenges as the market’s focus shifts to macroeconomic factors. Analysts could still slash earnings estimates from here, even though cuts have already happened.
That is because higher interest rates tend to lower inflation and economic demand with a delay. Banks are already pulling back on lending, an issue made worse by the recent banking troubles.
Indeed, the
Invesco S&P 500 Equal Weight Consumer Discretionary ETF
(RCD), currently at $128, has seen sellers consistently come in to knock it lower between $130 and $140 in the past couple of years because of these lingering concerns. It has risen a little over 20% since a September low point—and is now running into “resistance” at its current level.
Any substantial gains for consumer discretionary stocks might just have to wait a while, as concerns about consumer spending need to meaningfully subside.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
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