The retail sector has been riding higher, outperforming the S&P 500 index on encouraging Q4 earnings. This is especially true as retail stocks gained an average of 2.85% (average price difference between a day before and after the earnings announcement of a stock) versus the 0.77% gain for the broader index in response to earnings announcements, as per the Zacks Earnings Trend.
Total earnings from 93.9% of the sector’s total market capitalization reported so far are up 5.7% on revenue growth of 5.5%, with 76.5% beating earnings estimates and 64.7% beating on the top line. While the earnings growth rate is much higher than Q3 and the four-quarter average, revenue growth is modestly below Q3 but higher than four-quarter average. With respect to beat ratios, both are trending upward when compared to the past four-quarter average.
In particular, earnings from Home Depot (HD), Lowe’s (LOW), Gap Inc. (GPS), and Target (TGT) has been solid, leading to surging stock prices and bullishness in the broad retail sector. However, the earnings miss from J. C. Penney (JCP) as well as revenue miss and sluggish guidance from Wal-Mart (WMT) and Macy’s (M) has put some barriers in the way of outperformance of the retail space.
The robust performance of the sector is primarily driven by higher consumer spending, which rose 4.3% in the fourth quarter, reflecting the fastest pace since 2006. This is especially true as a stronger economy, better job and wage prospects, and lower oil price are leading to fatter wallets and greater spending power.