What the Big Retailers’ Earnings Results Really Tell You

It was a battle of the retailers this earnings season, pitting department stores against the mega retailers. As we discussed last Saturday, Macy’s (M) reported a dismal second quarter on August 14. The company missed on both the top and bottom lines, and the stock sank about 15% on the news.  Folks who had been following my Portfolio Grader would’ve known to stay far away from Macy’s ahead of the earnings report, as the stock was already F-rated, making it a strong sell.

This week, I want to look at a few more retailers and to discuss what the results say about the economy and how we should be playing the trends for more gains.

Nordstrom, Inc. (JWN), another well-known department store brand, isn’t looking too hot, either. The company reported a mixed second-quarter report on August 21. Earnings came in at $0.90 per share on revenue of $3.87 billion. Earnings topped the estimated $0.77 per share, so this represented a 16.9% earnings surprise. However, the $3.87 billion in revenue was 1.3% below the expected $3.92 billion.

While the stock did pop on the news, it’s still down 34% since the start of this year. And part of the revenue miss was because it didn’t carry enough “key items” and struggled addressing the rising demand for discounted products. In fact, Off-Price sales (including Nordstrom Rack, its discount store) fell 2%. This is especially disappointing because Off-Price sales increased 7% last year.

In addition, sales at the department stores dropped 6.5%, compared to the 5% decrease a year ago. This, coupled with the other weak results, caused company management to lower its full-year earnings outlook from $3.25­ to $3.65 on $15.5 billion to $15.9 billion in revenue to $3.25 to $3.50 on $15.5 billion in revenue.

Its Report Card in Portfolio Grader tells a similar story.

Leading into the earnings report, the fundamentals were severely lacking. Sales and earnings growth had been weak – which was made very evident in the second-quarter earnings report – and its Quantitative Grade was an F. While the stock is up today on above-average volume, average trading volume is only around 4.6 million. Clearly, the smart money is staying far away from this stock.

Walmart and Target Are the Winners

And then we have Walmart Inc. (WMT) and Target Corporation (TGT).

On August 15, WMT announced solid second-quarter earnings. Adjusted earnings came in at $1.27 per share, which topped analysts’ estimates for $1.22 per share. So, WMT reported a 4.1% earnings surprise. Total revenue increased 1.8% year-over-year to $130.4 billion. This was above the Street’s expectation of $130.1 billion. The stock jumped almost 6% at the open.

What was really impressive, though, was that the company’s same-store sales rose 2.8%. This was the strongest same-store sales growth WMT has seen in more than a decade. Given the fact that the fear-mongering media is still telling folks that a recession is on the horizon, this growth is huge! It shows that even more consumers are opening their wallets than a year ago.

Looking forward, company management raised its guidance. It is now forecasting fiscal full-year earnings to be as high as $4.91 per share, versus its initial forecast of earnings for $4.79 per share.

Now, let’s see how Walmart’s earnings report affected its grade in Portfolio Grader.

As you can see above, WMT earns a “B” for its Total Grade. While its fundamentals still need some work, its Quantitative Grade tells us that the stock is seeing excellent buying pressure. So, we know that the smart money is still very much interested in this blue-chip retailer.

And last, but certainly not least, we have Target, which released its second-quarter report yesterday morning.

TGT stock soared almost 17% at the open and hit a new 52-week high of $103.38 after the company announced results that beat on the top and bottom lines. (It hit another 52-week high of $106.52 today.) Second-quarter earnings increased 22% year-over-year to $1.82 per share, well above analysts’ estimates for $1.62 per share. So, this represents a 12.3% earnings surprise. Revenue of $18.4 billion topped consensus for $18.3 billion by a hair.

For full-year fiscal 2019, company management is now forecasting earnings of $5.90 to $6.20 per share, well above previous estimates for $5.75 to $6.05 per share and Wall Street’s estimates for $5.94 per share.

So, what did the Portfolio Grader have to say about buying Target ahead of earnings? Let’s take a look below.

Its Total Grade is a “B,” so it was a buy heading into earnings. The fundamentals aren’t terrible, but buying pressure was strong, earning it a B-rating there, too.

A Sector or Stock Picker’s Market?

Now, I’m talking to you today about these retailers’ earnings to highlight one important fact: we’re not in a sector market anymore. For example, the SPDR S&P Retail ETF (XRT), which tracks the retailers, is down 2.8% since the first full trading day of 2019. So, had you invested in only this sector, your portfolio would be in the red right now. And even if you’d only invested in Macy’s, Nordstrom, Walmart and Target, you’re looking at an overall C-rating for the Total Portfolio.

The truth of the matter is that we’ve entered a stock picker’s market. The physical stock market is shrinking, which means that you need to pick the right stocks, rather than invest in only sectors.

This is exactly what I do for my subscribers. I pick the crème de la crème of stocks across all sectors, which has resulted in a very smooth, risk-adjusted performance. And now, out of the 33 Platinum Growth Club Model Portfolio companies that have reported their earnings, 30 turned in a positive earnings surprise! This means that 91% of the Model Portfolio companies have reported earnings surprises.

This is no surprise to me, as these companies have shown consistent growth, strong buying pressure and a history of earnings surprises. So, the smart money will keep pouring in and driving these stocks higher over time.

While earnings season has come to a close (minus a few stragglers, of course), now is when the buyback activity will heat up. I expect the buybacks this August to be relentless, as even more companies will likely take advantage of the low interest rates by implementing or adding to stock buyback programs in the upcoming weeks. This will be especially good for my Platinum Growth Club subscribers, as I recommend many dividend growth stocks across all of my services. Plus, by late September, these Model Portfolio companies should benefit from quarter-end window dressing.

Clearly, there’s a lot to look forward to. And that’s exactly why I’m making a very bold prediction that means very good things for investors. Click here to find out exactly what it is.

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