5 takeaways from the latest retailer earnings

But now that consumer trends have stabilized after years of upheaval, following specific trends won’t be enough to boost stock prices. One of the most important takeaways from the industry’s first-quarter earnings season is that it’s a stock picker’s market and what matters is company execution.

For example, shares of specialty clothing retailer Abercrombie & Fitch rose 24% the day after the company reported earnings, while rival American Eagle Outfitters fell almost 8% on the earnings news. Both companies posted year-over-year revenue growth, but investors punished American Eagle for higher-than-expected selling, general and administrative expenses, Morgan Stanley analyst Alex Straton wrote in a note Thursday.

“We saw more winners and losers rather than everyone looking like they were comparing their performance,” San Marco, who manages Neuberger’s Next Generation Connect Consumer ETF, said on a call with Barron’s.

Here are four other earnings season topics:

Consumers are resilient but picky

Investors and economists have been increasingly concerned about recent reports that consumer spending will decline as Americans struggle with inflation, higher interest rates and fewer sources of fiscal stimulus. However, the reported results are likely to allay fears that shoppers are heading towards a spending cliff. Many retailers managed to increase sales in the period that ended in late April for most, or at least meet revenue expectations for the quarter.

That said, consumers are becoming more selective in what they buy and where they buy it.

“Consumer health… I would say it is as we described: pressured, insightful, very selective,” Macy’s said

CEO Tony Spring talks to investors about financial results.

Companies with strong brand momentum, such as Abercrombie, Deckers Outdoor’s Hoka and Dick’s Sporting Goods
,

they kept buyers engaged and saw inventory increase after the results were released.

Value wins – again

The macroeconomic environment played a role in selecting the season’s winners. Value is top of mind for consumers looking to stretch their budgets. Largely because of this, big box retailers like Walmart and Costco Wholesale showed signs of gaining market share last quarter.

Off-price retailers such as Burlington Stores
,

TJX Co.
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and Ross Stores

also performed exceptionally well.

“Consumers prefer to search for treasures in stores offering products at discounted prices,” wrote Robert Drbul, an analyst at Guggenheim Securities. “We continue to favor the down-price sector, driven by a favorable environment given the greater supply of branded goods in the market, stronger value proposition and wider range compared to pandemic levels.”

Demand for high-value products remains low

Many consumers are postponing discretionary purchases, which has negative consequences for sales growth at companies like Lowe’s
,

Home warehouse
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Best offer
,

and Purpose
.

Encouragingly, some of these retailers indicated that they have seen encouraging signs of improving discretionary demand.

“As inflation stabilizes, our members are returning to purchasing more discretionary items,” said Costco Chief Financial Officer Gary Millerchip.

Change efforts are bearing fruit

Investors have so far rewarded distressed retailers that have demonstrated that their turnaround efforts are working. Gap
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for example, the company’s shares closed 29% higher on Friday, a day after the company posted better-than-expected earnings and saw same-store sales for its four brands turn positive.

“GPS’s first quarter is evidence of a textbook recovery in retail with sales growth, margin expansion and overall banner share growth,” Barclays analyst Adrienne Yih wrote in a research note on Friday.

Macy’s and Foot Locker also recorded improvement, which, however, gave them a slight increase after the publication of the companies’ results

Macy’s has since given up some of its profits.

Abercrombie is a model of a company that has emerged from the retail abyss. The fashion retailer’s turnaround strategy, which emphasized better merchandising and a friendlier in-store experience, restored the brand’s shine and finances and helped lift its shares by more than 440% in the last 12 months.

But even successful retailers should guard against complacency, San Marco warns. “In a few years, the goal will be somewhere else,” he says.

Write to Sabrina Escobar at [email protected]