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Key Predictions for Q3 Earnings Reports of JWN, M, KSS

It is almost time to bid adieu to the third-quarter earnings season. As we near the end, we have results on the board from a large chunk of S&P 500 members with only about 15% (or 94) of Index members left to their quarterly numbers. While most sectors are nearly through with the quarter’s reporting cycle, the Retail-Wholesale still has a considerable chunk of reports to come. Incidentally, our focus in the article will also be upon Retail stocks that are slated to report earnings on Nov 9.

Q3 Earnings Scorecard

Per the Earnings Preview dated Nov 3, about 406 of the S&P 500 members have reported results so far, representing 85.4% of the Index’s total market capitalization. Of the 406 S&P 500 members that reported their quarterly numbers, approximately 73.9% delivered positive earnings surprises, while 66.7% beat top-line expectations. Total earnings for these companies were up 7.5%, on 6.3% revenue growth.

Key takeaways from the results so far point to clear revenue momentum as top-line growth has been accelerating compared with other recent periods. Further, the quarter has seen an above-average proportion of positive surprises, reflecting the carry forward of momentum from the preceding quarter. Thirdly, we have seen a favorable trend of estimate revisions for the December quarter, which is different from the pattern witnessed in the last few periods where estimates for the following quarter generally start to decline as the current quarter progresses.

Coming to expectations, S&P 500 companies are expected to report earnings growth of 6.5% year over year, with a 5.6% jump in revenues. Thus, the overall picture looks favorable for this reporting cycle.

A Look at Retail Sector

The performance of the index is determined by all 16 Zacks sectors. While results for the Finance sector have been below average, this earnings season is turning out to be a good one for the Industrial Products, Technology, Construction and Medical sectors.

As stated earlier, we are yet to see a sizable chunk of earnings to be released from retailers. Per the latest report, earnings for the Retail-Wholesale sector on the whole are expected to improve 0.1%, with revenue growth of 6.2%.
 
The Retail-Wholesale Staples sector is currently ranked among the bottom of the 16 Zacks sectors. A close look at the sector reveals that retailers continue to bear the brunt of the current challenging retail environment. This can be accountable to sluggish mall traffic, volatile consumer spending and increased competition from online players. Further, these retailers are heavily investing in e-commerce and omni-channel functionalities, which are likely to weigh on margins at least in the near term.

However, we note that the Retail-Wholesale sector has grown 22.9% year to date, outperforming the S&P 500 market’s jump of 16.1%.



What Awaits JWN, M, KSS in Q3?

Well our research shows that for stocks with the combination of a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP, the chance of a positive earnings surprise is high. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

So, let’s see what awaits the following Retail stocks that are queued up for earnings releases on Nov 9.

We are not confident of an earnings beat for the Seattle, WA-based Nordstrom Inc. JWN in the third quarter fiscal 2017. This is because the company currently has an Earnings ESP of +0.00% with both the Most Accurate Estimate and the Zacks Consensus Estimate pegged at 63 cents per share, alongside a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Nordstrom’s shares have lost 18.3% in the last three months, wider than the industry’s decline of 2.2%. The downturn was owing to the temporary call off of the Nordstrom family's plans to take the company private.



However, we laud Nordstrom’s positive earnings surprise trend and remain optimistic on the company’s cost saving initiatives, store expansion efforts and progress on 2020 strategy. Though the company’s growth strategy bodes well, investments related to occupancy, technology, supply chain and marketing are likely to weigh upon its near-term cost and margins performance. Evidently, its merchandise performance was hurt by higher occupancy expenses related to new Rack and Canada stores in the previous quarter. Moreover, for fiscal 2017, management anticipates Retail gross profit to be impacted by higher new store occupancy expenses and mix impact from off-price growth.

Further, the company’s projections for SG&A expenses incorporates higher technology and supply chain expenses related to its growth initiatives, offset by progress in productivity improvements. Given the margin pressures, it is unlikely to predict the outcome of the upcoming quarter results. (Read more: Will Higher Expenses Mar Nordstrom's Q3 Earnings?)

Moving to Macy’s Inc. M, we are not very optimistic about this department store chain retailer that has delivered an average trailing four-quarter negative surprise of 19.9%. Macy's has an Earnings ESP of -32.09% as the Most Accurate Estimate of 13 cents is pegged below the Zacks Consensus Estimate of 19 cents. Moreover, it currently carries a Zacks Rank #4 (Sell).

Additionally, Macy’s shares have declined 23.9% in the last three months, wider than the industry’s 15.9% downside.



Macy’s has announced a slew of measures revolving around stores closures, cost containment, real estate strategy as well as investment in omni-channel capabilities to enhance sales, profitability and cash flows. Additionally, the company is developing e-commerce business and has recently announced the restructuring of merchandising operations. These seem inevitable given the challenging retail landscape, aggressive pricing strategy, waning mall traffic and increased online competition that have been weighing on Macy’s performance. The company’s dwindling top and bottom-line results is the reflection of the same. Further, the company expects comps on an owned plus licensed basis to decline approximately 2.5% in the third quarter. Given this background, we remain skeptical of Macy’s performance in the third quarter. (Read more: Will Macy's Succeed in Reporting Higher Q3 Earnings?)

Finally, let’s assess the earnings beat criteria for Kohl’s Corporation KSS, a U.S. based department store chain that operates specialty department stores and an e-commerce site (www.Kohls.com) in the United States. While the company currently carries a Zacks Rank #2, our earnings beat criteria was let down by its Earnings ESP of 0.00%. Both the Most Accurate estimate and the Zacks Consensus Estimate for third-quarter fiscal 2017 are currently pegged at 71 cents per share.

We note that the company has outpaced the Zacks Consensus Estimate in the trailing four quarters, with an average positive surprise of 18%. However, Kohl’s has been struggling with weak comps and a difficult retail sales scenario for the last few quarters. This indicates that the company’s “Greatness Agenda”, which was designed to increase transactions per store, has been failing to deliver adequate results. The consensus mark for the third quarter projects flat comps compared with the prior-year quarter.

Nevertheless, Kohl's has been undertaking initiatives to boost store performance. Since October, the company has started offering more outside famous brands, while cutting down sales of in-house clothing brands. Kohl's stores have begun accepting returns from Amazon.com’s AMZN customers on select products in 82 of its U.S. store locations. Additionally, we expect Kohl's third-quarter performance to benefit from surging e-commerce business.

Notably, these endeavors have helped Kohl’s shares gain 2.2% in the past six months, as against the industry’s decline of 21.7%. Let’s see if such efforts will enable Kohl’s to overcome these hurdles in the third quarter. (Read more: Will Soft Comps Weigh on Kohl's This Earnings Season?)



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Amazon.com, Inc. (AMZN): Free Stock Analysis Report
 
Nordstrom, Inc. (JWN): Free Stock Analysis Report
 
Macy's Inc (M): Free Stock Analysis Report
 
Kohl's Corporation (KSS): Free Stock Analysis Report
 
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