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Retailers See First Signs of Coronavirus Impact – Here’s What to Look For — ICYMI

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Investors should now be looking out for the earnings reports, which won’t be pretty.

Consumers worldwide are staying home, quarantined from work and school. They fear stepping outside in the U.S. and Europe, where the virus has spread. And even as governments implement quarantines and take other precautions, the spread could be rapid.

Early first-quarter economic data showed strength in the U.S., with GDP for the period coming in on recent trend, at 2.1%. Jobs added in February were a net 273,000, beating economists’ estimates of 174,000. That supported consumer spending.

But we likely haven’t yet seen those numbers affected by the coronavirus.

With governments taking more action to contain the virus’s effects, retailing analysts are saying that the data coming in are dismal, across businesses. 

Some notable retail sub-industries: apparel, home goods and restaurants.

With no end to the virus in sight, it’s hard to know if all the bad news for 2020 financial results are priced into retail stocks. but investors should consider a number of factors now.

The Invesco Consumer Discretionary S&P U.S. ETF is down almost 12% year-to-date, outperforming the S&P 500’s loss for the year of 15.2%. It’s been heavy manufacturing sectors like semiconductors a s well as banks that have been hit the hardest, as manufacturing supply chains have been disrupted and yields have plummeted. Oil demand has also been dealt a blow.

Now, the “coronavirus [is] starting to weigh on demand as consumer behavior changes,” wrote Wedbush Securities’ team of retail and consumer analysts in a note. The firm said more than a third of U.S. survey respondents are shopping less at stores and more than half intend to shop far less in the next month.

Morgan Stanley retail and apparel analyst Kimberly Greenberger sees the “first sign of North America [foot] traffic weakness.” She said February foot traffic in department stores declined 9.1% from the year-earlier month.

It’s important to note that consumer spending for the month was buttressed as people stocked up on staple groceries at places like Costco  (COST) - Get Costco Wholesale Corporation Report, which just beat earnings estimates for that reason.

But apparel and department stores could see worsening data for March. “We could see double-digit traffic declines beginning in [the second week of March] as U.S. cases continue,” Greenberger said.

As for European spending on global U.S. apparel companies, Greenberger said, a European retail-company executive told her that “sales have been down 5% to 10% in European urban areas in the last two weeks.” In her report, Greenberger focused on Nike undefined among other stocks.

As for other retailers hit by the outbreak, “home-improvement and discretionary hard-line likely [were] impacted materially in the near term,” Wedbush said. And restaurants are “pricing in [a] material impact.”

Here’s a check on the stock movements of retailers that are top of mind and where the 2020 earnings estimates are.

Nike shares are down 20% to $83 from their 2020 high. Earnings estimates came down on account of management’s February preannouncement. But 2020 EPS are still poised to grow year-over-year to $2.92.

What to watch on earnings: Will management take forward-12-months estimates down even more? The virus is still raging and quantifying the impact is difficult. Nike has been hit particularly hard as it has 15% revenue exposure to China, which was hit hard early on in the quarter but is now rebounding.

Dicks Sporting Goods  (DKS) - Get Dick's Sporting Goods, Inc. Report is down 36% from its 2020 high, to $31 a share. Forward-12-months EPS estimates are still for growth to $3.84, but investors should watch for further quarterly pronouncements.

Home Depot  (HD) - Get Home Depot, Inc. Report and Lowe’s  (LOW) - Get Lowe's Companies, Inc. Report are down 13% and 20% from their 2020 highs, respectively. Home Depot has recently shown that it’s taking market share from Lowe’s.

They trade at $214 a share and $100 a share, respectively. And they’re looking at an estimated EPS result for 2020 of $10.52 and $6.57, with those estimates vulnerable.

Darden Restaurants  (DRI) - Get Darden Restaurants, Inc. Report is down 40% to $72 a share. Analysts are still looking for 2020 EPS growth of 9% to $6.34.

TJX (TJX Companies)  and Burlington  (BURL) - Get Burlington Stores, Inc. Report, both coming off strong quarters, are down 20% to $200 a share and 12% to $56 a share from their 2020 highs, respectively. These names could have downside to earnings estimates for the year.

Bottom line: Analyst estimates for the year could well drop. Management teams will guide more than cautiously for the year because they have little or no visibility.

And for investors expecting strong revenue and earnings comparables in 2021, now may not be the best entry point. The economic damage may last well beyond 2020. 

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