rain, flooding

Flooding in parts of the U.S. coupled with a snap of cooler weather in other parts of the country kept shoppers indoors, which weighed heavily on weekly sales. The Retail Economist‐Goldman Sachs Weekly Chain Store Sales Index declined 5.4 percent for the week ended June 1.

The drop in weekly sales follows a host of retailers reporting dour quarterly results, which resulted in a larger number of companies cutting their outlooks.

Michael P. Niemira, chief economist of The Retail Economist LLC, said floods in the central part of the U.S. “and cooler temperatures across much of the country — except for the Southeast, which experienced a heat wave — curbed the consumer’s appetite for spending at the nation’s multichannel retailers over the past week that included the Memorial Day holiday.”

Niemira described the retail spending pattern as “very choppy in the second fiscal quarter.” But on a year-over-year basis, it’s in line with 2018. Based on recent retail quarterly reports, the coming months present some challenges for companies — who are lowering their second-half outlooks.

Ike Boruchow, senior analyst at Wells Fargo Securities, said in a research note this week that, with the first-quarter earnings season “now winding down, it’s increasingly evident that 2019 has gotten off to a challenging start for retailers — as evidenced by the fact that the average stock in the group is now negative 18 percent.”

“We believe there are three primary reasons why the group has come under so much pressure in the past six weeks — two of which are well-understood by investors and one that may have flown under the radar,” Boruchow said adding that the first is a deceleration in consumer spending that began in the fourth quarter of last year, which led to a “high number” of outlook cuts this most recent quarter.

The analyst said of the 32 major retailers that have posted first-quarter results to date, about half have “either lowered their fiscal year guidance, guided below consensus for the second quarter or provided an initial fiscal year outlook that fell below expectations.” Boruchow said 25 percent of companies reporting recent results raised their guidance, which is vastly different from the same period last year where 55 percent of retailers raised earnings and sales guidance.

Secondly, the “tariff risk is back” Boruchow said, citing President Trump’s “increasing rhetoric around the trade war with China” along with threats to Mexico. The analyst said he sees a 10 percent “headwind” on gross margins for the retailers in his coverage area, and after various cost adjustments, this would translate to a drag on earnings per share of about 5 percent.

The third, “under the radar” impact on retail outlooks “is from the addition of lease-debt to the balance sheets,” Boruchow said adding that this has impacted EBITDA multiples. The analyst said investors who are retail focused have been “lease-adjusting balance sheets for years.” But some generalist investors have not, and have been “swayed by this debt-related accounting change.”

Looking ahead, Weather.com is calling for more lousy weather across the South, Midwest and Plains. The site said flash flooding remains a threat. And flooding along the Mississippi River “may last through the summer.”