With Q1 reporting season almost over, it’s becoming quite clear that the earnings momentum in the market’s two major pillars — technology and retail — is slowing. If this trend persists, it won’t be hard to predict that investors have seen the best of the decade-long expansion in stock markets.
Some of the US largest technology companies, including Apple, Alphabet, and Intel, have been hurt by weakening demand for their products and services, and cracks have begun to appear in their future expectations.
The broader picture also doesn’t look promising. For 15 straight quarters through last June, profits from technology companies outpaced the S&P 500, with the growth gap averaging 6.3 percentage points. But that edge is quickly waning. Profits for the first quarter fell more than 6%, the worst in a decade.
Retail is another area of the market where companies have started to feel the pinch. Kohl’s Corp, JC Penney, and Nordstrom, which all posted their financial statements last week, reported declines in their first-quarter sales this week, while Home Depot posted a weaker-than-expected rise in comparable-store sales.
The Sino-American trade war makes the outlook particularly grim for these companies. Earlier this month, the Trump administration imposed a 25% tariff on 200 billion USD in Chinese goods, up from a 10% duty that was put in place in October.
Kohl’s, which imports about a fifth of its goods from China, said that additional costs related to rising import tariffs prompted it to lower its guidance for the year. The home-improvement chain Home Depot estimated it will spend about 1 billion USD more to buy goods with the 25% tariffs in place.
Despite these disappointments, however, it wasn’t all bad news for the retail sector. This week’s disappointing earnings reports were in contrast with an earlier report from the big-box retailer, Walmart Inc.
Overall, with 97% of the companies in the S&P 500 reported actual results for the first quarter, 76% posted a positive EPS surprise and 59% have reported a positive revenue surprise.
The earnings growth declined for the S&P 500 is -0.4%.
Home Depot beats Q1 earnings expectations
Home Depot exceeded Wall Street’s estimates on the bottom-line in fiscal first-quarter results, but missed expectations for comparable same-store sales as unfavourable weather earlier this year dented demand for the retailer’s products.
The home improvement retailer delivered adjusted earnings of 2.27 USD per share on revenue of 26.4 billion USD for its fiscal first quarter. The consensus analysts expected the company to report adjusted EPS of 2.18 USD on revenue of 26.4 billion USD for its fiscal first quarter. In the year-ago quarter, the company posted sales of 24.9 billion USD and adjusted EPS of 2.08 USD.
Same-store sales growth has moderated. Sales at stores open at least 12 months rose 2.5% on a global basis and were up 3% in the US. This was shy of the 4.2% estimate, but it wasn’t immediately clear if the numbers were comparable due to an extra week in the year-ago quarter.
Seventeen of 19 regions in the US reported negative same-store sales in February, while only two regions reported same-store sales declines for the quarter.
Home Depot also reaffirmed its guidance for fiscal 2019. It sees revenue growth of about 3.3% for the year, along with a 5% increase in comparable same-store sales. Adjusted EPS is expected to grow 3.1% from last year to 10.03, below the 10.09 USD consensus analysts expected. This guidance does not take into account any potential impact from the recent hike to tariffs on Chinese-made goods to 25%, management said during a call with investors Tuesday.
Kohl’s posts decline in Q1 revenue and profit
For its first quarter, Kohl’s Corporation has reported total revenue of 4.087 billion USD, a drop of 2.9%, while comparable sales decreased by 3.4%. The company said diluted earnings per share were 0.38 USD, down by 16%, while adjusted diluted earnings per share reached 0.61 USD, a drop of 5%.
Reported net income of 62 million USD decreased by 17% and non-GAAP net income of 98 million USD was down by 8% compared to the same quarter last year.
Updating its outlook, the company said, it now expects adjusted annual earnings per diluted share to be 5.15 USD to 5.45 USD, compared to its prior guidance of 5.80 USD to 6.15 USD.