As U.S. markets trend lower after their stellar July performance, more and more investors are wondering if we are headed for a double-dip recession. Anxiety is running especially high in the retail and broader consumer discretionary sectors, which have faced some unique headwinds during the traditionally slow summer months ahead of the back-to-school season. With the boosts of stimulus spending and census employment quickly wearing off, many investors are curious to see how retail firms have fared this summer against a backdrop of elevated unemployment and continued weakness in consumer confidence levels.
Two key companies in the retail/consumer discretionary sector report earnings today, which should help to clarify the market's direction going forward. This comes after weakness in July retail sales, which rose 0.4% from June -- slightly below the 0.5% expected increase. However, excluding autos, building materials, and gas, sales fell 0.1%, suggesting that consumers are continuing to batten down the hatches in anticipation of a continued economic storm. "The consumer is getting more cautious," said David Wyss, chief economist at Standard & Poor's. "We're setting up for a weak start to the third quarter."
WMT is expected to post earnings of 97 cents a share, up sharply from 88 cents a year earlier on $105.5 billion in sales. Many expect the company to squeeze out 0.1% in same-store sales growth to break the one year streak of declines. "The biggest challenge the company has right now is their core customers are under so much pressure," said Joe Feldman at Telsey Advisory Group, adding that Wal-Mart's lower-income shoppers are facing pressures such as higher gasoline prices and the stubbornly high unemployment rate [also read Three ETF Ideas For the Third Quarter].
Meanwhile, HD is expected to produce earnings of 71 cents, ahead of last year's profit of 67 cents, thanks in large part to a share repurchase program that some believe could add as much as two cents to the company's second-quarter earnings. Analysts are optimistic that the company will post solid growth despite ongoing weakness in the housing market thanks to warm weather, which may have boosted sales for outdoor equipment and air conditioners. Some are predicting that same-store sales are expect to rise an average of 2.8%, a third straight quarter of increases. "We believe that traffic will again be positive in the quarter and that average ticket will be flat to slightly positive," Merrill Lynch analyst Alan Rifkin said. Should this trend be confirmed, it could help to buoy the struggling sector heading into the fall quarter [also see Be Careful What You Wish For: Rising Yuan Could Hurt Retail ETFs].
With these key earnings reports on tap, the Merrill Lynch Retail HOLDR
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Disclosure: No positions at time of writing, photo is courtesy of Jared C. Benedict.
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