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Retail Projections Rosier Than Sentiment

The retail sector is in focus as disappointing results and dramatic guidance reductions from the department stores have investors questioning the state of the U.S. consumer. This week, a more comprehensive view of the retail space will be revealed as 10 of the specialty retailers, plus Target, Walmart and Dollar Tree report results. We believe the largest risk lies within the retail outlook, which despite the pessimistic sentiment for the group, has not been appropriately adjusted by analysts.

The retail industry group represents 41.0% of the consumer discretionary sector’s market capitalization. More than one-third of the retail market capitalization will release results this week.

Given the heavy weighting of retail within consumer discretionary, investors should focus on the outlook retailers provide this week. Currently, 2016 earnings growth is pegged at 15.1% for the retail industry group, the greatest growth in the consumer discretionary sector. While the outlook for department stores has been reset, after Macy’s and Nordstrom cut their outlooks by 15% and 20%, respectively, at the midpoint, estimates for the retailers left to report have only been reduced by 1.6% since January 1 (see detail below). Of note, the 22.3% reduction in The Gap’s numbers is excluded from our calculation as they pre-announced earnings last week. Given the pessimistic sentiment for the retail group, and the 21.3% reduction in the department store outlook, we find it surprising that growth has been reduced by such a small amount to-date. This perhaps suggests a significant amount of risk remains in the outlook for retailers.

Download the full report for additional detail on the retail Q1 set-up, who should benefit and the consensus outlook by retailer.

Retailer FY16 Year-to-Date Change in EPS Estimates

 Retailer

Source: S&P Global Market Intelligence

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