Retail Space Takes a Hit With Missed Earnings

While it’s hard to make much sense of the market’s day-to-day movements at present, there is no such issue with what is expected to happen to Disney (DIS) and Macy’s (M) shares in today’s session. They both missed the mark in their Q1 earnings releases – Macy’s this morning and Disney after the close on Tuesday.

Even though expectations were fairly low for Macy’s to begin with, as the department store bellwether has been struggling for a while now, it missed on the top-line as well as on same-store sales and guidance for the full year. The retailer blamed continued weakness in the apparel category and ‘double-digit spending reductions by international visitors in major tourist markets where Macy’s and Bloomingdale’s are key destinations…’ Macy’s recent struggles – the stock price is roughly half of its year-earlier level – is a true reflection of the challenging environment for traditional retailers.

It isn’t so much a question of consumer spending, but the relevance of the traditional department store business model in the current environment that forces them to compete simultaneously on two fronts, with Amazon (AMZN) stealing their business at one end and discounters at the other end. Macy’s isn’t alone in its online challenges; many other retailers are in the same boat.

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There is also this emerging narrative of over-capacity in the retail space, which is making it difficult for all retail operators. The Fossil (FOSL) earnings report after the close on Tuesday is an example of this narrative. The stock is down big in the pre-open and dragging down the entire retail space.

Many traditional retailers have still to report Q1 results, but the earnings reporting cycle has effectively ended for most other sectors. We know that earnings and revenue growth was weak across the board this earnings season, a persistent issue over other recent quarters as well. In fact, Q1 was the 4th quarter in a row of earnings declines for the S&P 500 index and we are on track for another quarter of negative earnings growth in Q2.

One relatively positive development this earnings season was the decelerated pace of negative revisions to Q2 estimates compared to other recent periods. Confirmation of this trend at the next earnings cycle later this summer will be the first improvement in the earnings backdrop, raising confidence in future estimates.

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