Retail sector earnings are in the spotlight at present, with the reporting cycle effectively over for most of the other sectors. The Retail sector got off to a good start this earnings season, with growth rates and beat ratios coming in better relative to pre-season expectations as well as other sectors. But the initial momentum primarily reflected good results from the restaurant operators and online vendors.

We have seen the trend shift course in recent days as more traditional brick-and-mortar operators, particularly department stores like  Macy’s (M – Analyst Report), Nordstrom (JWN – Analyst Report) and others, have reported results. Above average unsold inventory levels at all the department stores mean that they will have to offer deep discounts in the holiday shopping season to move merchandize. The weak guidance for the current period across this space reflects this inventory overhang. This week’s reports from sector leaders Wal-Mart (WMT – Analyst Report) , Target (TGT – Analyst Report), Home Depot (HD – Analyst Report) and others will round out the sector’s final picture for the Q3 earnings season and outlook for the holidays.

Consumer spending hasn’t increased to the extent earlier expected on account of energy savings, but it’s not bad either. Households appear to be squirreling away part of the energy savings, but they have been spending on things like autos, household items, restaurants and, most importantly, online. And when we talk about online shopping, we are really talking about Amazon (AMZN – Analyst Report). Most of the traditional operators have belatedly started investing in their digital operations as well, but Amazon has become the undisputed leader of the digital retail space in a big way. We see this Amazon effect in the aggregate data for the sector as well, as explained in the following section.

Retail Sector Scorecard  

As of Friday November 13th, we have seen Q3 results from 22 of the 43 retailers in the S&P 500 index. Total earnings for these 22 retailers are up +7.8% from the same period last year on +11.1% higher revenues, with a below index-average 59.1% beating EPS estimates and 45.5% coming ahead of top-line expectations.

This is better growth performance relative to what we have seen from this same group of 22 retailers in other recent periods. But the growth momentum in Q3 is primarily due to strong performance from Amazon and easy comparisons at Walgreens Boots (WBA – Analyst Report). Strip out these two companies from the sector’s results and the comparison to other recent periods becomes unfavorable, as the left-hand chart below shows.