Despite headwinds, retailers are expected to post positive earnings

After The Home Depot’s report Tuesday morning, the rest of the week’s ‘earnings-palooza’ rolls on for big retailers. Target, TJX Companies (parent of TJ Maxx and Marshall’s), and Lowe’s release their data on Wednesday, while Walmart releases its report on Thursday.

Perhaps it should be a super-challenging environment for these giant multi-channel retailers that cross product categories and depend on a broad swath of consumers to drive sales and profits.

After all, those consumers are facing higher gas prices — again — plus high interest rates, stagnant real wage growth, and a sluggish job market. Retailers themselves face plenty of economic headwinds: higher transportation costs, snagged supply chains, and tariffs known and unknown.

But still, they’ve been doing very well: Overall, the market has had a stellar run of second-quarter financial results, according Sam Stovall, chief investment strategist at CFRA Research. And that extends to the big-box chains selling stuff to America’s beleaguered consumers.

“Retailers are actually doing relatively well,” Stovall said. “Consumer staples merchandise category — which holds Walmart, Target, Costco — it is up about 9% for the year.”

Though it’s a bit of a mixed bag. Sellers of some big-ticket items are struggling.

“Automotive retail — 14% decline in earnings,” Stovall said. “Home furnishings retail — 10% decline. But apparel has been up 10%.”

He said it’s discount retailers who are getting the most love from cash-strapped consumers.

“When times get a bit challenging, consumers tend to trade down,” he said. “They are going to go to a Walmart rather than a Macy’s.”

Some higher-end consumers are making that trade too, according to Sameer Samana, head of global equities and real assets for the Wells Fargo Investment Institute.

“You’ve seen Walmart and Target start to kind of go up-market — at least compete for wallet share,” Samana said. “You know, it could be that even the upper end of the ‘K’ is feeling some stress.”

He attributes that to slowing stock market gains and layoff announcements in tech and middle-management. Given all the economic stresses consumers and retailers face right now, Samana isn’t overly impressed with the sector’s performance.

“I think what you’re seeing in a lot of consumer discretionary stocks is this sigh of relief — that it could have been worse,” he said. “And somehow, some way, consumers are still finding dollars in the couch cushions so to speak, to go out and spend.”

Samana said that could change. If consumers start acting the way they say they feel — which is pretty bleak about the economy and their own financial prospects — the run of good results for retailers could peter out.