The Q1 earnings season has crossed the halfway mark, with earnings and revenue growth well on track to mark the highest in seven years.
However, two factors are dampening the optimism for this reporting cycle. First, estimates for the quarter under review have remained stagnant, as was the case at the start of the season. Second, though the positive surprises are trending beyond historical levels, they have so far failed to beat the previous earnings cycle, especially with respect to revenue surprises.
Per Earnings Preview dated Apr 27, the total earnings for the S&P 500 index in the first quarter are projected to improve 22.6% year over year on revenue growth of 8.4%. In fourth-quarter 2017, earnings and revenues have increased 13.4% and 8.6%, respectively.
The first-quarter 2018 earnings season has seen releases from nearly 267 S&P 500 members as of Apr 27. Per the latest report, the scenario looks compelling, with 76.8% of the members delivering positive earnings surprises and 73.8% trumping top-line expectations. In fact, the proportion of companies pulling off earnings and revenue beats is a stellar 61.4%. Also, earnings for the companies that have reported their financial numbers advanced 25.1% from the year-ago period, with revenues up 10%.
The performance of the index is not restricted to a single sector, and of the 16 Zacks sectors, only the Autos space is expected to witness an earnings decline in the reporting season. While textile-apparel stocks like — Under Armour, Inc. UAA and Hanesbrands Inc. HBI — form part of Consumer Discretionary sector, Tapestry, Inc. TPR belongs to Retail/Wholesale sector.
According to the above report, total quarterly earnings for the Consumer Discretionary sector are likely to grow 12.1% year over year, with revenues expected to increase 6.6%. In fact, margins are also estimated to edge up 0.6% year over year. This bullish projection can be attributed to gain from a buoyant U.S. economy characterized by rising consumer confidence, improving consumer spending and an accelerating labor market.
Meanwhile, Retail/Wholesale sector has long been witnessing an evolving environment where retailers are adhering to various omni-channel techniques for providing a seamless shopping experience. Impressively, total earnings for the sector are likely to increase 17.8% year over year in Q1, courtesy of revenues growth of 7.8%. The sector’s margins are also expected move up 0.4% year over year.
Our research shows that when a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) stock is combined with a positive Earnings ESP, the chance of beating earnings estimates is high. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
All said, let’s find out where Under Armour, Hanesbrands and Tapestry stand ahead of their earnings releases on May 1.
Key Predictions for UAA and HBI
Under Armour has pulled off a positive earnings surprise in three of the trailing four quarters, with an average beat of 10.2%. However, the company missed the earnings estimate in the last reported quarter. Moreover, the Zacks Consensus Estimate for the first quarter of 2018 is pegged at a loss of 5 cents, wider than the loss of a penny reported a year ago. Analysts polled by Zacks expect revenues of $1.12 billion, almost flat with the year-ago quarter figure. Per management, revenues are likely to decline or remain flat year over year in Q1. Also, it envisions loss per share in the range 6-7 cents due to adjusted operating loss of nearly $15 million.
Moreover, prolonged weakness in the North American business and soft margins are likely to hurt the company’s quarterly results. Further, Under Armour has been struggling to keep interest expenses in check. However, sustained focus on brand development, restructuring plans, expansion of direct-to-consumer and technology-based fitness businesses remain encouraging. The company currently carries a Zacks Rank #3 and has an Earnings ESP of +11.31. (Read: How is Under Armour Stock Placed Ahead of Q1 Earnings?)
Leading designer and marketer of basic apparel, Hanesbrands has a mixed record of earnings surprises in the trailing four quarters. In the fourth quarter of 2017, it pulled off a negative earnings surprise of 1.9% that is likely to continue in the first quarter of 2018. The Zacks Consensus Estimate for the first quarter is pegged at 24 cents, mirroring a year-over-year decline of 17.2%. Moreover, the company has been battling higher cost of sales and marketing expenses due to a challenging U.S. wholesale landscape.
Nevertheless, Hanesbrands has been benefiting from its strong international performance and increasing organic sales, thus resulting in top-line growth. Apparently, analysts polled by Zacks expect revenues of $1,431 million for the first quarter, up about 3.7% from the year-ago quarter’s figure. Notably, the expectation lies within management’s forecast of net sales in the band of $1.42-$1.44 billion for the quarter. The company currently carries a Zacks Rank #3 and an Earnings ESP of -0.92%. (Read: Hanesbrands Q1 Earnings: Can Strategies Pare Cost Woes?)
What Lies Ahead of TPR?
Tapestry boasts an impressive earnings surprise history, with a beat in each of the trailing four quarters by an average of 11.9%. The Zacks Consensus Estimate for third-quarter fiscal 2018 is pegged at 50 cents, up nearly 8.7% from the year-ago quarter. Further, the consensus mark for revenues is projected to be $1,302 million, up from $995 million in the year-ago quarter.
Furthermore, Tapestry’s approach to adapt to the evolving retail landscape is commendable. The company is also undergoing a brand transformation and introducing modern luxury concept stores in key markets. In this regard, management is viewing the acquisitions of Stuart Weitzman and Kate Spade as a significant step toward becoming a multi-brand company. Moreover, Tapestry has undertaken transformation initiatives revolving around product, stores and marketing, alongside expanding its e-commerce platform. These are likely to have a favorable impact on its third-quarter results. It has a Zacks Rank #2 and an Earnings ESP of +2.15%. (Read: Check Out Tapestry's Probability to Beat Q3 Earnings)
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