With roughly 441 of the SP 500 companies having reported their Q3 ’15 earnings, (Factset says 444 SP 500 companies have reported), there isn’t much new about the Q3 ’15 results that you couldn’t have read already on this blog for the last 8 weeks.
Three retailers report this week: Macy’s (M), Kohl’s (KSS) and Nordstrom’s (JWN), and the expectation is that none of these stocks, absent a REIT transformation or some significant M&A activity, will move the earnings needle much.
If readers truly want to see the damage caused to mass-market general merchandise retail, check the charts of Macy’s, Nordstroms, and Kohl’s. Wow – Macy’s and Kohl’sis are now trading under their 200-week moving averages, with Macy’s struggling to hang on. Nordstrom’s is the only one of the three to be trading above its 200-week moving average. 2015 has been a VERY tough year for these three stocks.
This is strictly an opinion, but these types of retailers, as formidable as the brands are, along with names like JC Penney (JCP) are flush in the cross-hairs of the death match occurring between Amazon (AMZN) and WalMart (WMT). (Long AMZN and WMT)
Looking at these three charts, you begin to understand how brutally competitive retail really is, in terms of brand-building and differentiation.
How Important is WalMart to Retail Sales, Inflation and Wage Growth ?
Wal-Mart doesn’t report their fiscal Q3 ’16 until November 17th, 2015, but I couldn’t help wonder if the October “average hourly earnings” increase contained within the October ’15 jobs report was a function of WMT’s increase in wages for their rank and file employees. Most investors don’t realize that Wal-Mart is the single largest private employer in the US. You would think if WMT hiked wages, it would begin to show up in the “wage growth” data in the job’s reports and in the various economic reports published by the St. Louis Fed. (FRED database). September’s “average hourly earnings” were +0.0%, versus the +0.2% expected, but October’s was +0.4% versus the +0.2% expected, thus over the two-month period, expectations were inline. However given the importance of WalMart to the US economy and the US employment picture, my question remains, “Will WalMart wage hikes stir the wage inflation debate ?”
In the early 1990’s, Joe Nocera, the famed New York Times business writer, who penned the column 1 article for the Saturday edition of the New York Times Section noted that it was probably due to WalMart that consumer inflation (as measured by the CPI) remained so well contained, given the success of their business model and “EDLP” (Every Day Low Price) mantra, and the fact that at that point in time, given their revenue and revenue growth, WMT likely accounted for mid-single-digit percentage growth of total US retail sales.
Today, that mantle is owned by Amazon, thanks to what may be the more formidable business model of the 21st Century. In a $15 trillion US economy, of which 2/3rd’s or roughly $10 trillion is consumption, the death match between the largest bricks-and-mortar retailers and the largest e-commerce retailer could keep a lid on inflation for – well – a very long time. Think about it – is there any consumer product that cant be sold online – other than maybe an automobile – and I’ve often wondered why US automakers haven’t started cutting out the dealer middlemen and tried marketing cars directly online. It does seem implausible, but so did ecommerce 20 years ago.
If you are curious as to how much damage has been done to WalMart’s stock, $57 is the 200-month moving average, and the stock is trading just above that key level.
Many of the mainstream financial pundits have compared Amazon’s market cap of $300 billion to WalMart’s $188 billion and compared the death-match over between the two retailers. However, WalMart’s expected fiscal 2016 revenue is $488 billion (ends January ’16) while Amazon’s expected 2015 annual revenue is $107 billion.
Don’t count WalMart out just yet.
Analysis/conclusion: A whole bunch of retailers will report in November and December ’15 as is always the case in the last 2 months of each quarter, and this is a sector that is truly under siege, even with the drop in gas prices. Personally, it is my opinion that the whole sector would benefit from an extended period of mild “inflation” which would benefit retailers top-line and operating margins, but the primary reason this isn’t happening is that Amazon is keeping tremendous pressure on pricing.
Cisco Systems (CSCO) also reports this week, and it continues to be one of the 1990’s growth giants that has lagged badly off the ’09 low. Cisco is facing the same dynamic as the rest of the former Nasdaq 100 leaders from the late 1990’s: the crore switching and routing businesses are secular low to mid-single-digit growers, while Cisco tries to transform the rest of the business into faster growth. (Long a very small CSCO position in one long-term account.)
SP 500 earnings by the numbers:
Forward 4-quarter estimate as of Friday, November 6 was $124.10
The P.E ratio on the forward estimate is 17(x).
The PEG ratio is still negative.
The SP 500 earnings yield is 5.91%
The y/y growth of the forward estimate was -1.93% as of Friday, Nov 6th, improved from last week’s -2.09%.