Retailers Reflect on Q4 Earnings

by Warren Seah

As Valentine’s Day candy gets marked down and the holiday season fades into memory, retailers are gearing up to report their fourth-quarter earnings. While boasting about gains made during the most lucrative quarter, they may downplay the challenges anticipated in 2024, with investors eyeing those potential obstacles.

Big-Box Leaders Take the Stage

Walmart and Home Depot will lead the pack in sharing their earnings reports, followed by other retail giants like Lowe’s, Costco Wholesale, Target, and Macy’s in the weeks to come.

A Brighter Season than Expected

Despite concerns, the 2023 holiday season exceeded expectations for many retailers and analysts. November and December saw retail sales increase by nearly 4% compared to the previous year. Though this growth rate was slightly lower than in recent post-pandemic holiday seasons, it surpassed most industry forecasts.

Optimism in the Air

Several companies, including Abercrombie & Fitch, Lululemon Athletica, and American Eagle Outfitters, raised their fourth-quarter financial guidance early in the new year. Moreover, initial reports from brands like Crocs, Estee Lauder, Under Armour, e.l.f Beauty, and Tapestry showcased better performance than anticipated. Analysts predict that upcoming results will likely follow suit, reflecting a strong Q4 performance.

Market Expectations

According to Jefferies analyst Corey Tarlowe, companies like Walmart, TJX Cos., and Burlington Stores, offering value-oriented products, are expected to deliver solid results as consumers sought to make their holiday budgets stretch. Additionally, brands catering to affluent clientele, such as Abercrombie and Lululemon, are also poised for success.

Caution Amidst Positivity

While robust fourth-quarter performances are anticipated, they may not guarantee a positive market response. Analyst Alex Straton from Morgan Stanley points out that much of the sector’s stock prices already incorporate the gains from the holiday season.

As retailers gear up to share their financial results for Q4, industry watchers remain vigilant about potential market reactions and overall sector performance.

Navigating High Valuations During Earnings Season

As companies gear up for earnings season, facing high valuations and soaring investor expectations, the pressure is on to deliver stellar results. A recent example is Shopify, which exceeded expectations yet saw its shares nosedive due to concerns about management’s free cash flow forecasts.

The Impact of Forward Guidance

Analyst Michael Baker points out that forward guidance for the upcoming year often steals the spotlight from fourth-quarter reports. With January’s retail sales plummeting by 0.8% compared to December, signaling a consumer spending slowdown, companies are expected to approach guidance cautiously.

Richard de Chazal underscores this sentiment, highlighting a shift in consumer spending momentum. Home improvement retailers and department stores are feeling the pinch, grappling with sluggish sales in a challenging market environment.

Trends to Watch

Subcategories within the retail sector will bear the brunt of this slowdown, with home improvement stores experiencing prolonged sales weakness. Meanwhile, uncertainty persists for department stores such as Under Armour, Ralph Lauren, and VF Corp, which have all cited substantial declines in U.S. wholesale demand.

Beyond Financial Guidance

While financial guidance holds significance this earnings season, Baker emphasizes the importance of margin growth. Following challenges from the “inventory debacle of 2022,” companies are expected to operate more profitably as production and freight costs ease, potentially offsetting any dip in sales growth.

This earnings season promises to be a critical one for companies navigating market uncertainties and investor expectations.

You may also like

Leave a Comment