Soaring Profits & Even Higher Hopes–Retail Earnings Kick Off with a Bang


Even though earnings season is winding down, high-profile retail players reported their latest results this week, giving us a peek into consumer behavior during the last quarter.

Home Depot’s (HD Quick QuoteHD ) top and bottom-line figures showed impressive growth. Sales rose 8.1% year-over-year to $4.1 billion thanks to solid comparable sales gains. Net income jumped 11% to $4.8 billion, or $4.53 per share, driven by a 12.7% increase in stock buybacks.

But investors focused on one weak metric of HD’s report: customer traffic fell 6% in the second quarter, a dramatic decline when compared to the almost 20% increase the company had seen in recent months. Even though Home Depot offset this decline with higher spending per visit, it’ll be difficult moving forward for sales to keep improving if traffic continues to slow down.

Then we had Target’s (TGT Quick QuoteTGT ) latest update. The big-box chain once again reported an incredible quarter. Adjusted EPS spiked 8% to $3.64 per share, comfortably ahead of the Street consensus of $3.49 per share. Comparable store-sales rose 8.9% compared to the prior-year period, and grew over 35% on a two-year basis.

One key factor that made TGT’s second quarter successful was its same-day fulfillment strategy, which lets customers pick up or get their orders delivered that day through Shipt. Same-day services grew 55%, while Drive-Up (Target’s curbside pickup service) sales surged over 80%.

Fellow giant Walmart (WMT Quick QuoteWMT ) benefitted from strong back-to-school shopping trends, boosting 5% comps growth for Q2. Even though this marks a sequential and year-over-year deceleration, the retailer has notched 14.5% growth over the past two years. The company also said that customer traffic remained solid, and management pointed out that it won more market share in key categories like apparel, groceries, and home furnishings.

Walmart even sees current growth trends continuing through the rest of 2021, and it reiterated spending goals—at least $14 billion this year alone—to help improve everything from its supply chain and delivery networks to its e-commerce platform.

Looking at Macy’s (M Quick QuoteM ) , the top department store chain generated meaningful sales and earnings growth in a stellar second quarter. Total sales rose 1.8% compared to 2019 to $5.65 billion, while comps increased almost 6%; comparable sales also grew at each of Macy’s banners, including a double-digit rise at Bloomingdale’s. Additionally, a strong demand environment helped boost adjusted EPS to $1.29 per share, or nine times the analyst consensus, and gross margin increased 1.8 percentage points compared to Q2 2019.

Investors and analysts still remain skeptical of Macy’s long-term competitiveness in the retail space, but the many growth strategies it’s beginning to implement—a new partnership with Toys ‘R Us, new brands, updating its e-commerce channels—as well as pent-up consumer demand could result in plenty of upside for the company.

The Biggest Takeaways

Investing in retail can be tricky. Last year showed us who was able to not only weather, but thrive, in a once-in-a-lifetime pandemic; 2020 also showed us how brutal it is out there for brick-and-mortar businesses, both big and small.

What I’m seeing from the first slate of Q2 retail earnings reports is that consumers are in the mood to spend. I know I am—I want new everything, especially clothes and shoes and accessories. Retailers are relishing in this spike in demand, updating their outlooks for the rest of the year and doubling down on spending and strategic investments.

However, the rise of the delta variant could likely curb consumer sentiment and traffic, and with fewer people receiving unemployment benefits or stimulus payments, the second half of 2021 looks a little cloudier than it used to just a few weeks ago.

But H2 brings the all-important holiday shopping season. Even if coronavirus cases creep higher or further restrictions come back, I still feel like people are going to keep spending. They’ll just be spending online rather than in-store, and most key industry players have enhanced their online platforms (after learning a hard lesson last year) to keep up with demand.

Next week, we get more quarterly updates from the likes of Best Buy (BBY Quick QuoteBBY ) , Ulta Beauty (ULTA Quick QuoteULTA ) , and Williams-Sonoma (WSM Quick QuoteWSM ) , among many other retailers. I anticipate more impressive numbers.

If you’re looking to add some retailers to your portfolio, make sure you focus on the companies with the most robust fundamentals—think healthy cash flow, low debt levels, and a strong competitive position.

Disclaimer: I own TGT, HD, and BBY in the Income Investor Portfolio.

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