Optimism Improves Ahead of Q3 Retail Earnings

The leftovers are gone, the must-have toys have been lost, and resolutions lie broken. There's just one more holiday event to go, and that's fourth quarter earnings reports from large U.S. retailers. Overall expectations reflect energetic consumer spending, but the markets will be paying more attention to the outlook for tariff management and consumer sentiment volatility as 2025 continues.

In the coming weeks, investors can expect earnings reports from some big-box retailers: Walmart (WMT), Home Depot (HD), Lowe's (LOW), Target (TGT), and Costco (COST). Because holiday retail sales were strong, revenue and earnings numbers may be good and in line with expectations throughout the sector. Instead, the focus will be on expectations for 2025.

Amazon (AMZN) set the tone with its earnings report on February 6. Sales climbed 10% to $187.8 billion in the fourth quarter, compared with $170 billion a year earlier. "The holiday shopping season was the most successful yet for Amazon," said Andy Jassy, Amazon's President and CEO, in the earnings release. Of course, claims of success by CEOs do not always translate into results.

Along with the good news about the December quarter, Amazon's management signaled concerns about the first quarter, primarily due to exchange rates. The strong dollar is likely to affect other retailers with international operations, such as Walmart and Home Depot.

Amazon's earnings came out shortly after the February 2025 release of the Michigan Surveys of Consumers, which showed continued declines across the board. The Index of Consumer Sentiment for February is below where it was a year ago, and consumers are gearing up for inflation. Meanwhile, the federal government has been enacting some tariffs, especially against imports from China, and had earlier been discussing others including against goods from Mexico and Canada.

"Tariffs could stifle growth and weigh on margins, in general, but companies with consumer staples or popular brands might weather the storm," said Alex Coffey, senior trading strategist at Schwab.

Amazon draws retail resiliency from its e-commerce domination and Prime membership fees.

Walmart operates the second largest e-commerce platform, but continues to lag Amazon in online sales. However, Walmart's bricks and mortar presence could  matter in 2025.

"Walmart's grocery and consumer staples mix allows consumers to trade down," Coffey said. "Tariffs could hit margins, but groceries and staples could give Walmart some resiliency against competitors." The company's heavy investments in AI may help it manage its vast inventory more efficiently as it works to close the gap with Amazon.

Meanwhile, "Target has more discretionary products," Coffey said. Target's inventory levels will give an indication about whether the company is growing or not; an inventory buildup might signal markdowns and perhaps declining future margins.

Although smaller than both Walmart and Target, Coffey said Costco has built-in resiliency from membership fees, and consumers often turn to bulk purchases to save money.

A new tariff on goods shipped directly from China, and the end of a de minimis exception on low-value orders could create some havoc for low-priced Chinese retailers such as Temu, Shein, or Ali Express. Of course, those same tariffs could be negotiated out of existence.

Data from Home Depot (HD) shows that its business mix is about half do-it-yourself and half professional, but does this give it greater cushion against market uncertainty than Lowe's (LOW), which reports a smaller base of professional contractors among its shoppers. Both have dealt with a tough market for home improvement, between the end of post-pandemic renovations and the slow housing market. However, the Commerce Department reported that new home sales rose 3.6% to a seasonally adjusted annual rate of 698,000 units in December, a sign of life that could influence results for both companies. "Home improvement has not recently been an outperforming area," Coffrey said, "but EPS growth at Lowe's should be interesting due to efficiency efforts and pursuing growth in the professional business."

Overall S&P 500 fourth-quarter consumer discretionary earnings are expected to rise 24.6% year over year, according to consensus from FactSet published in January. The sector includes retailers like Amazon, Target, and Walmart but also airlines and automakers. Revenue growth, seen at 5.5%, according to FactSet, is lower and suggests that companies have been growing profit margins.

But past performance is no guarantee of future results. U.S. jobs growth slowed in January (143,000 new jobs added in January, down from 307,000 in December); the Consumer Price Index rose 3.2% year over year in December. Meanwhile, bird flu has been wreaking havoc with food prices, and each day's headline has a new report about tariffs and government job cuts. All of this might have hurt shopping demand.

For now, expectations of good fourth-quarter earnings per share (EPS) growth seem to be crowding out the nerves, as the Consumer Discretionary Select Sector Index ($IXYTR) climbed 17.9% between November 1 and February 1, compared to 5.1% growth of the S&P 500^® index (SPX) over that span.

The consumer discretionary sector got some friendly news the last few weeks from companies reporting before the retail earnings season began in earnest. Nike (NKE), Deckers Outdoor Corporation (DECK), General Motors (GM), Ford (F), and Albertsons (ACI) all reported better-than-expected earnings.

Although post-holiday political and economic events may scramble the full-year outlook for retail companies, Coffey said that investors may still get a feel for current conditions by watching this earnings season.

Another way to get a sneak preview of retail earnings season is to peek at credit card providers' earnings. Both Visa (V) and Mastercard (MA) surpassed analysts' fourth-quarter projections, and because most retail transactions take place electronically, that could be a hopeful sign for the retail earnings to be reporting in coming weeks.

For the major retail firms reporting over the next two weeks, analysts expect the following, according to Yahoo Finance:

• WMT EPS of $0.64, up 6.7% from a year ago, on revenue of $187.74 billion.
• TGT EPS of $2.23, down 25.2% from a year ago, on revenue of $31.81 billion.
• Home Depot EPS of $3.01, up 6.7% from a year ago, on revenue of $38.7 billion.

Keep in mind analysts can be wrong, even when viewed as an average. Another point to remember is that even if a stock reports earnings in line with the expectation, the market's reaction remains unpredictable.