Zacks Earnings Top Trends: Target, Walmart, and TJX

For immediate publication

Chicago, IL – August 24, 2023 – Zacks Research Director Sheraz Mian says, “For the 480 S&P 500 companies that reported second-quarter results, total earnings declined -8.5% from the same period last year on revenue up +0.8%.”

Profits remain more stable: no cliff in sight

Note: Below is an excerpt from this week’s Earnings Trends report. You can access the full report, which includes detailed historical actuals and estimates for the current and future periods, click here>>>

Here are the key points:

The overall earnings picture remains stable and resilient, with the outlook actually starting to improve over the past few months. The revision trend has clearly stabilized recently, with estimates for several key sectors moving higher.
This evolutionary earnings forecast runs counter to the long-feared “profit chasm” narrative.
For the 480 S&P 500 companies that reported second-quarter results, total earnings were down 8.5% from the same period last year, on a 0.8% increase in revenue, with 79.4% of companies topping earnings per share estimates and 65.4% topping revenue estimates.
For Q3 2023, S&P 500 earnings are now projected to decline by -2.0% on +0.5% higher revenue. Excluding the energy sector, Q3 earnings for the rest of the index would rise by +3.4% on +3.2% higher revenue.

The somewhat mixed performance of traditional retailers in their second-quarter earnings reports was primarily due to the effectiveness of management actions and, to a lesser extent, to a significant reduction in consumer spending.

We discussed Objective TGT last week, which missed top-line and comp estimates but did better on margins and inventory. We noted that while management seemed pleased with current inventory levels, investors will rightly wonder whether Target has actually addressed this issue if weak sales and traffic trends in Q2 result in unsold inventory in the coming periods.

Unlike Walmart WMT, whose quarterly report showed overall strength, Target has struggled in the post-COVID-19 era, failing to anticipate changes in consumer spending that shifted away from discretionary categories like apparel, home furnishings and electronics, resulting in unsold inventory that then had to be sold through price cuts.

Walmart stumbled last year after its first-quarter report, as did Target, but quickly recovered. In its second-quarter report, Walmart benefited from broad market share gains and momentum behind key growth initiatives.

While Walmart has a much larger grocery business, Target has always been seen as more of a play on discretionary goods, for which demand has fallen in the post-Covid period. That said, Target appears to be losing more than other retailers selling comparable goods, with TJX Companies A good example of such a retailer is TJX.

The challenge for retailers like Target, Walmart, TJX and others is not only having the right assortment, but also dealing with higher costs related to shipping, wages and other issues.

In the detailed report, we have included an updated estimate of the second-quarter financial results for the Zacks Retail sector.

Excluding the Retail sector, the Q2 2023 reporting cycle has concluded for 11 of the 16 Zacks sectors, while 96% of the S&P 500 companies have already reported their results.

Q2 2023 is on track to be the third consecutive quarter of declining earnings for the S&P 500. Earnings are now expected to decline again in Q3 by -2.0%, before growth turns positive in Q4 and continues into 2024. In fact, earnings in Q3 would have been positive were it not for the decline in the energy sector.

The long-awaited recession is not showing up in this short-term earnings outlook. The overall picture of corporate profitability in the long term also leaves little room for recession.

Growth expectations reflect current consensus earnings estimates for individual S&P 500 companies, which are in turn based on estimates from individual sell-side analysts covering those companies.

Regular readers of our earnings commentary will be aware that we saw a marked stabilization in the estimate revisions trend since the beginning of the second quarter of 2023, reversing the negative trend that had been ongoing for almost a year prior.

Earnings estimates for the S&P 500 have declined only slightly since early April, with a number of key sectors seeing modest positive estimate revisions. These sectors include construction, industrial products, automotive, technology, medical, and retail. These trends were confirmed and reinforced by Q2 earnings results and management guidance and commentary for the current and upcoming quarters.

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