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U.S. retailers' results drive up discretionary profit estimates

The entrance to The Home Depot store is pictured in Monrovia, California August 13, 2012. REUTERS/Mario Anzuoni
The entrance to The Home Depot store is pictured in Monrovia, California August 13, 2012. REUTERS/Mario Anzuoni

By Caroline Valetkevitch

NEW YORK (Reuters) - Strong U.S. retailer results this week have bumped up discretionary earnings estimates, which could give some relief to worries about pricey valuations for the sector.

The fourth-quarter profit growth estimate for S&P 500 consumer discretionaries jumped from 6.7 percent on Monday to 8.7 percent Friday, with results from Home Depot , Macy's and Priceline.com among the strongest influences, Thomson Reuters data showed.

Retailers' shares have risen sharply for the week and month, too. The S&P 500 retail index <.SPXRT> jumped 4.5 percent this week, its best weekly percentage gain since November 2012, and climbed 8 percent for February, its best month since October 2011.

But the index remains down 0.3 percent for the year after falling 7.7 percent in January. The S&P 500, by contrast, is up 0.6 percent for 2014 so far.

"I think too many people were either too short or underinvested in the retail space, figuring the terrible weather we've had was going to persist and that the retail results were going to be underwhelming," said Michael James, managing director of equity trading at Wedbush Securities in Los Angeles.

Many investors have supported the view that harsh winter weather was behind recent weakness in U.S. economic reports, including retail sales data.

"I think (results) we've seen this week justify higher valuations for the retail space in general," James said.

The forward price-to-earnings ratio for the S&P consumer discretionary is at 18.5, well above 15.5 for the entire S&P 500 and the highest of the 10 S&P sectors, according to Thomson Reuters StarMine data.

To be sure, discretionary results for the first quarter may have been more negatively affected by the weather.

Eighteen S&P companies in the sector so far have issued negative outlooks for the first quarter, while not one has issued a positive one, Thomson Reuters data showed.

Priceline.com, for instance, forecast profit of $6.35 to $6.85 a share for the first quarter, while analysts expected

$7.19.

Growth in the sector has been driven by companies in home improvement, e-commerce and autos within the sector, with e-commerce benefitting from the bad weather, said Natalie Trunow, chief investment officer of equities at Calvert Investment Management in Bethesda, Maryland.

Weather "might affect first quarter more than the fourth," she said.

(Reporting by Caroline Valetkevitch; editing by Andrew Hay)

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