22 Nov Capital 19 Catch-Up

Retail Earnings Impress As Big Technology Boosts An Impressive Nasdaq Quarter

The US retail sector was on show last week as some of the biggest brand names in the world reported their earnings. On the whole, they were impressive results, however, the lingering concerns over inflation could be found throughout the guidance from most companies which kept the major indices from running higher. The issues of supply chain problems and labour shortages continue to hold back future earnings for at least the next quarter before the retailers hope to get some clear air at some stage in 2022.

Covid-19 concerns also had the markets spooked. Especially later in the week as Austria announced it was going back into a full lockdown and Germany also increased restrictions. Countries across Europe are still experiencing an increase in cases despite high vaccination levels and this is keeping those that sell into the region concerned. This is despite the fact that we have new treatments coming on line, including Pfizer’s new drug, which will hopefully see hospitalisations a thing of the past. The oil price, which had already fallen from heights not seen since 2014, is now back to early October levels around the $75 mark for a barrel of WTI crude on the expectations of decreased demand.

Tech stocks were the main winners last week. Bond yields eased for much of the week which is always great for the bigger tech names. This helped the Nasdaq continue its impressive quarter where it is up more than 10% so far. It gained another 1.2% for the week while the other major indices struggled. The S&P500 could only manage a 0.3% gain over the five sessions, while the Dow fell heavily, losing 1.3% for the week as some major names, including Visa (V), suffered large falls.

Visa fell 4.7% on Wednesday after Amazon (AMZN) announced it was suspending Visa payments in its UK operations from the start of next year. The move came after Visa increased its interchange fees for transactions between the UK and the European Union after Brexit changes meant they were no longer required to cap costs. Amazon, being one of the largest retailers in the world, have decided to flex their muscle on the issue and it would be very surprising if this wasn’t resolved before the ban takes place. There is no way Visa will be locked out of such a massive market and will have to offer Amazon a discount. Expect this to happen in the next few weeks.

Retail sales for October showed consumers were continuing to ramp up spending despite rising costs. Sales were up 1.7% for the month, up from 0.8% in September, while economists were expecting to see 1.2%. Spending was up by 4% at online retailers, with online sales in total up a hefty 10.2% year on year. Electronics retailers, and appliance and hardware stores also impressed. Restaurants and bar sales were flat for the month but will be expected to rise in the next few months as the recovery continues and the Delta variant continues to subside.

Department store chain Macy’s (M) led the retailers on the earnings front. Their move towards online sales saw Macy’s add 4.4 million new customers in the last quarter as they also benefitted from ” an improved economic environment”. Profits were in at $1.23 per share, almost $1 more than expected, while revenue hit $5.4 billion above the expected $5.2 billion, and up from $3.99 billion a year ago. Macy’s jumped 21% in the Thursday session which saw it hit three-year highs but then lost 7% on Friday.

Other retailers to make impressive moves after their earnings reports included Home Depot (HD) who made 5.7%, Chinese retailer JD.Com (JD) who rose 6%, Kohl’s (KSS) who gained 11% and Gap (GPS) who rose 4.3%. Bath and Body Works (BBWI) made 5% in the Wednesday session, as did lingerie seller Victoria’s Secret (VSCO) who jumped 14% higher. Elsewhere, financial and accounting software maker Intuit (INTU), owners of Quickbooks, continued its stellar year beating estimates and raising guidance and rising 10% in the final session of the week. Intuit is now up 85% year to date.

Walmart (WMT), the world’s largest retailer in terms of revenue, struggled on the exchange despite beating on both the top and bottom lines and raising its yearly forecast. Its share price dropped 2.55% as same-store sales rose by 9.2% however online sales slowed to 8% when analysts were hoping to see 20% growth. The future looks strong however as Walmart leverage their massive size advantage to avoid the same supply issues that rivals are experiencing. CEO Doug McMillon exclaimed “There’s a level of excitement in the air. You can feel it. I’ve been walking away from these stores with a recurring thought, ‘We’re ready, we have the people, the products, and the prices to deliver a great holiday season.’”

Fellow retailer Target (TGT) also beat expectations on profit and revenue but warned that rising costs would have an impact on its results in the next few quarters but it planned to absorb the costs rather than pass it onto customers. TGT lost 4.7% on the news. Away from the retailers software provider Cisco Systems (CSCO) missed revenue estimates and guidance after facing supply constraints and higher logistics costs. CSCO dropped 6% on the news.

Overall 95% of the S&P500 have reported earnings with 81% of them beating expectations. That’s not bad considering the continuing complaints of supply shortages and increasing costs. So far profits are on track to hit 42.3% year on year for the quarter. It will be fascinating to see how this continues into 2022 as economies continue to reopen but remain impeded by inefficiencies in the transport system and rising inflation.

The week ahead will be a shortened one as the US stops on Thursday for Thanksgiving. The following day is also a half-day as markets close at 1.00 pm New York time. This Friday also marks the start of the Black Friday sales weekend through to the Cyber Monday sales at the start of next week so it will be another important week for the retailers. Earnings are winding down, and there will be no releases on Thursday or Friday, however, we will see report cards from the likes of Zoom Video (ZM), Urban Outfitters (URBN), recent stock report subject HP (HPQ), and Best Buy (BBY) earlier in the week.

Have a great week.