WMT - LSEG's 2024 Retail And Restaurant Earnings Outlook

2023-12-21 22:55:00 ET

Summary

• As 2023 comes to an end, the U.S. consumer has remained resilient in the face of macroeconomic challenges.
• The bulk of retailers have a lower inventory turnover ratio than their industry means.
• Consumers often splurged on discretionary items only when offered an enticing promotion.

By Jharonne Martis

As 2023 comes to an end, the U.S. consumer has remained resilient in the face of macroeconomic challenges. Higher inflation caused the consumer to think twice and become pickier about spending. Moreover, after two years of being cooped up at home, consumers' behavior changed as they gravitated towards services vs. goods.

LSEG 2024 retail outlook

The LSEG U.S. Retail and Restaurant index is expected to show a 4.1% revenue growth over last year's levels. However, the estimated earnings growth rate is expected to grow 26.1%, due to lower cost pressures from a year ago (Exhibit 1).

When looking at the retailers' revenue forecast for 2024, the next four quarters are expected to remain within the 3%-5% sweet spot that prevailed in 2023 (Exhibit 1). The LSEG U.S. Retail and Restaurant index is expected to show a 4.5% revenue growth in 2024 over 2023 levels. The estimated earnings growth rate is expected to remain in the double digits and show a healthy 10.8% earnings growth in 2024.

Exhibit 1: The LSEG Retail/Restaurant Earnings & Revenue Growth Rates: 2021 - 2024

In 2023, six of 10 consumer-related industries remained negative. Of the 205 retailers tracked by LSEG, the Broadline sector is headed for the highest earnings growth rate driven by Amazon's ( AMZN ) strength. Still, the Hotels, Restaurant & Leisure sector has consistently done well and is headed for the second-highest earnings growth rate in 2023, recording a 103.9% surge over last year's level.

This trend is expected to continue into 2024 with the Hotels, Restaurant & Leisure sector expected to be the strongest-performing sector. These firms have been benefiting from the fact that consumers feel more comfortable traveling, staying at hotels, and eating out after two years of staying at home due to the pandemic.

Our metrics show that all 10 consumer-related industries will improve in the lower positive digits for 2024 (Exhibit 2). The Broadline sector was the strongest consumer-related industry in 2023 and is projected to continue showing strength in 2024. However, Amazon is driving this strength.

Exhibit 2: The LSEG Retail and Restaurant Earnings Growth Rates: Consumer Industries CY 2024

The Broadline sector is receiving a huge boost from Amazon. The online giant is a favorite online shopping spot as it provides shoppers with convenience and discounts. Analysts polled by LSEG are already bullish on the company's performance this and next year. Its earnings are expected to grow 24.9% in 2024 on top of 2023's levels.

The earnings consensus for Amazon's fiscal year ending December 2024 is $3.57. Moreover, the LSEG StarMine SmartEstimate data shows investors can expect positive surprises this quarter from Amazon. This quantitative tool has proven to be very valuable and accurate to help forecast financial expectations during earnings season.

The SmartEstimate is a weighted average of analyst estimates, with more weight given to more recent estimates and more accurate analysts. Our studies have shown that when the SmartEstimate differs from the consensus (I/B/E/S mean) by more than 2%, the company is likely to post subsequent earnings surprises directionally correct 70% of the time. This percentage difference is referred to as the Predicted Surprise (PS%).

The 2024 Predicted Surprise for Amazon is 3.71%, suggesting the retailer is likely to beat the $3.57 earnings expectations and post a positive surprise. In fact, there's a five-star rated analyst with a very accurate rating that published a Bold Estimate, which is different (in this case higher) than the consensus estimate. The analyst expects Amazon to report a 2024 EPS of $4.31, well above the mean.

The same can be said for the four individual quarters in 2024; Amazon has a predicted surprise of 3.9% and higher for each quarter. This means that it is very likely that Amazon will continue to beat its earnings estimates in 2024 and post a positive surprise.

Exhibit 3: Amazon's StarMine Predicted Surprise - FY 2024

E-commerce 2024 retail outlook

According to the Census Bureau, e-commerce sales hit $284 billion in the third quarter of 2023. This represents a 7.6% growth from a year ago - which is a deceleration from the 10%+ growth we've been seeing during the pandemic. The $284 billion in e-commerce sales accounts for just 15.57% of total U.S. retail sales (Exhibit 4). Still, the LSEG IFR data suggest that the amount of money consumers spent online in 2023 will pick up and continue to grow in the double digits for 2024.

The forecast suggests that e-commerce retail sales are on track to grow to $337 billion by the fourth quarter of 2024. This will account for 17.8% of total U.S. retail sales, suggesting that for the most part, consumers prefer to visit brick-and-mortar stores. This represents a huge amount of business that Amazon has not fully tapped.

Exhibit 4: E-commerce as a Percent of Total U.S. Retail Sales

Holiday anticipation: inventory levels

As retailers enter the much-anticipated holiday season, inventory levels are crucial for the fourth quarter. Some are better poised for success in terms of inventory levels. When comparing several retailers' inventory turnover to their industry average, the results show that Nike ( NKE ), Kroger ( KR ), and Costco ( COST ) are ahead of the game. Costco is best positioned with a positive gap difference of 1.5 compared to its industry mean. Still, 66.66% out of the 30 companies in our sample had a lower inventory turnover ratio than their industry means. In this group, Dollar General ( DG ) has the biggest negative gap of 1.8 compared to its industry mean, suggesting inventory levels might not be as lean (Exhibit 5).

Moreover, when comparing Q2 to Q3 2023, Mattel ( MAT ) saw the biggest improvement in inventory turnover compared to its industry mean, followed by Abercrombie & Fitch ( ANF ). The teen retailer's merchandise has been resonating well and as a result is on track to post its third consecutive quarter of double-digit comps, as its projected to report a 12% SSS for Q4 2023. Similarly, Mattel's Barbie movie was a hit this past summer causing its revenue to jump 9.3% from a year ago. Its merchandise is in strong demand this holiday season, and its revenue is on track to show a significant 18.4% growth for Q4 2023.

On the flip side, Best Buy ( BBY ) saw the biggest deterioration in inventory turnover as sales have cooled down from its pandemic highs. Best Buy missed last quarter's SSS expectations and registered a -6.9% SSS for Q3 2023. The electronic retailer is on track to see a slight improvement in Q4 2024 with a 5.2% SSS growth.

Exhibit 5: Retailers' Inventory Turnover Difference Compared to Their Industry Mean: Q2 and Q3 2023

Discount levels - U.S. online retailers

The bulk of retailers have a lower inventory turnover ratio than their industry means, suggesting that more promotions were necessary to move the merchandise in the fourth quarter. The discount penetration (how much of the assortment is on sale) rose to its highest level in December this year. LSEG discovered this in collaboration with Centric Market Intelligence, formerly StyleSage, which analyzes retailers, brands, online trends, and products across the globe. The year is coming to a close and the discount penetration is 48%, above the 2022 and 2023 averages of 36% and 35%, respectively. Retailers face a more price-conscious consumer and have been offering more merchandise on sale to entice them to open up their wallets this holiday season.

Meanwhile, the average percent discount in December remains unchanged at 38.1% (Exhibit 6). This means that although retailers are ramping up the amount of merchandise on sale, the percentage discount hasn't gone up. In fact, the average discount is slightly lower than last year's 38.3% average, suggesting that retailers are luring shoppers with more merchandise on sale, but are being more cautious with margins.

Exhibit 6: Discount Penetration and Average Discount: U.S. Online Retailers

This year has been very promotional. In fact, retailers have told us that consumers often splurged on discretionary items only when offered an enticing promotion. As consumers remain value-oriented, they will continue to gravitate towards off-price retailers TJX ( TJX ) and Ross Stores ( ROST ) (Exhibit 7).

Other 2024 retail winners are projected to include Costco and Walmart ( WMT ). Meanwhile, the following retailers have a very strong loyal consumer base and are expected to see robust SSS: Abercrombie, Lululemon ( LULU ), and Ralph Lauren ( RL ). An increase of 3.0% in SSS signals that consumer spending is healthy. Loyal shoppers at Free People (6.5% SSS) and Anthropologie (4.1% SSS) will also continue to boost sales at the parent company, Urban Outfitters, in 2024.

Exhibit 7: The Strongest Same Store Sales Estimates for FY 2024 and FY 2025

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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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