The focus in the Q1 earnings season lately has been on the Retail sector, particularly the department store space, with every notable industry player coming out with disappointing results. Macy’s (M – Analyst Report) started the parade of disappointing results, but was quickly followed by every type of department store, irrespective of their target market.

Apparel is apparently the weakest category for these operators, with management teams appearing clueless as to what has happened to apparel demand. But that’s hardly the only issue facing these operators – they are dealing with a secular shift in consumer preferences, with consumers increasingly comfortable spending their money online at Amazon (AMZN – Analyst Report) instead of going to the mall. It isn’t a consumer spending issue, it is more tied to evolving consumer spending habits. In other words, the question isn’t how much consumers are spending, but where they are spending it.

The proof of this came in the largely positive monthly April Retail Sales report, with the report’s internals showing a lot of momentum. Of particularly relevance to the disappointing earnings results from the department stores lately, the April Retail Sales report’s sub-category about non-store retailers (includes operators like Amazon and other on-line and catalog vendors) had the strongest gain of all categories. What this means is that consumer spending is steadily shifting from the traditional avenues to online platforms.

These traditional retailers likely still have plenty of pain to endure, but they can start putting their house in order by aligning their businesses with evolving consumer preferences. It is hard to envision the industry surviving in its current format given Amazon’s operating momentum.

Retail Sector’s Q1 Scorecard

A number of major retailers like Wal-Mart (WMT – Analyst Report), Target (TGT –Analyst Report), Home Depot (HD – Analyst Report) and others are on the docket to report results this week, but we have already seen Q1 results from 55.8% of the Retailers is in the S&P 500 index. Total earnings for these retailers are up +3.2% from the same period last year on +9.7% higher revenues, with 75% beating EPS estimates and 50% beating revenue expectations.

Positive surprises are more numerous even for the Retail sector, as you can see in the right-hand side chart below.  

The growth picture emerging from the left-hand side chart doesn’t look so bad, with earnings growth in positive territory and revenue gains tracking above historical periods. But a lot of that momentum is a function of non-department store results that came out earlier in this cycle, particularly from online vendors like Amazon. The sector’s growth comparisons don’t look so good on an ex-Amazon basis, as the right-hand side chart below does.