Q3 earnings expectations: US retailers

As the season of quarterly reporting is about to start, it is interesting to review some expectations for the upcoming results season. These expectations are not about the share price or do not provide forecasts for investing.

The purpose is to reflect on the recent performance of some of the most interesting companies. Thus this is not a complete review of all big retailers, but of only some interesting ones, which could be seen as indicative of something bigger in the industry.

Amazon

As always, Amazon is the one to watch in terms of ecommerce. Amazon has flourished during the pandemic despite the fact that the entire ecommerce grew rapidly.

One of the most interesting questions with regards to Amazon is the transition from selling products to selling services. When will the service sales eclipse product sales?

Another similar trend in teh financial reporting of Amazon has been the meteoric rise of the Ads business. How long can it grow at this pace? Will the growth slow down to more Amazon-like numbers (from 40+% to 20+%), which very fast according to traditional retail standards. Some analysts claim that Ads business would be more profitable than AWS. Ads are already half the size of AWS and growing faster.

Third thing follow with regards to Amazon is the international business. For years the international business has lagged in growth to the bigger US business segment. And the international business has been unprofitable. For the last three qyarters the international business has outpaced US in growth. Since the start of the pandemic International business has been profitable. Will that trajectory continue toiwards the second half of the year?

Target

The pandemic was a time of momentous growth for Target. Of the big incumbent store based retailers Target was one of the fastest to grow. They enjoyed four quarters of nearly 20 % growth (3 of which were above 20 %). Q2/2021 saw a more normalised growth of 9,4 %, but still on a high level compared to pre-pandemic levels

Where will this growth settle to? Will Target be able to sustain the highly elevated level of sales?

At the start of the pandemic the growth was more driven by the digital channels, especially the  Drive up service. Since the pandemic the digital revenues have decreased a bit. Will the digital sales remain on the elevated levels in the coming quarters?

In terms of the revenue from different product categories, Food and Home categories have been driving growth during the pandemic and Apparel was struggling to grow. In the previous quarter Apparel was leading the growth, will that growth continue?

Target has also been opening new smaller foot print stores, will be interesting to see if that trend continues. Target can be regarded as a kind of an example on the big incumbent store retailers. They have been one of the best performing retailers so far. Thus, they could be considered as some kind of benchmark for others.

Dollar General

Discount retailers selling general merchandise and food saw big growth during the pandemic. Dollar General was the biggest and one of the fastest growing discounters during 2020. On the other hand, Apparel dependent discounters, such as TJ Maxx, had much more difficult times.

Conversely, over the last two quarters TJ Maxx has grown rapidly as the pandemic has loosened it’s grip of the society. At the same time Dollar General’s great streak of quarterly growth  came to an end as the Q1 and Q2 saw a slight decrease in the Year-on-Year growth.

Dollar General can be viewed as a kind of bellwether for the general merchandise discounters in the US.

Nordstrom/Macy’s

Department stores were among the biggest casualties of the pandemic. The revenues of Nordstrom and Macy’s tanked by 50 % and 40 % during the darkest quarters of the pandemic.

The recovery from has been rapid as both companies reported growth of 50+ % and 100 %. However, both companies are still trailing the revenue levels they had before the pandemic. Macy’s has recovered more robustly as their Q2 revenues were only -1,3 % below the pre-pandemic levels in Q2/2019. Macy’s has also been able to more rapidly to recover it’s gross margins, which are almost at a pre-pandemic levels of 40 %

Nordstrom has traditionally been the digital out performer in the department store sector. However they have been struggling more in the bouncing back from the pandemic. They are still -8 % from the pre-pandemic levels. Their gross margins are also significantly below (34,81 %) the longer term level of 40 %.