Earnings Preview | "Consumer Downgrading" Spreading, How Will Discount Retailers Perform in Q2? Keep an eye on Ross Stores this week

StockStory has learned that the frenzy of the Q2 US stock earnings season is coming to a close, with a series of retail companies set to report earnings this week. At this juncture, it is worth revisiting the most exciting part of the first quarter, the performance of discount retailers. This week, Ross Stores (ROST.US) is highly anticipated, with the retailer set to release its earnings after the market closes on August 22nd Eastern Time. Revenue is expected to be $5.24 billion, a 6.2% year-on-year increase, with expected Q2 earnings of $1.49 per share, a 12.9% year-on-year growth.

Many customers are looking for quality goods at affordable prices, leading to the rise of discount retailers. These retailers focus on selling general merchandise at deep discounts to provide value-added services. They leverage unique procurement and pricing strategies, including sourcing popular items in the market or purchasing excess inventory from manufacturers and other retailers, then reselling these snacks, tissues, toys, clothing, and numerous other products at attractive prices. However, despite the unique appeal of discounts, these retailers also have to contend with long-term challenges from online shopping and declining foot traffic in suburban commercial areas.

While the US stock market performed strongly at the end of 2023, this year has seen significant volatility, especially for stocks with high price-to-earnings ratios. Mixed signals about inflation have led to uncertainty about interest rate cuts, making the stock performance of discount retailers challenging. Since the latest earnings reports were released, the average stock price has fallen by 6.5%.

The first-quarter growth of the six discount retailers tracked by StockStory has slowed down. Overall, revenue was 0.6% lower than analysts' expectations, with next quarter's revenue expectations 5% lower than anticipated. Below are the performance and outlook of some discount retailers in Q1.

Ross Stores

Ross Stores, which sells excess inventory or overstock items from other retailers, sells clothing and other goods at much lower prices than department stores through the discount concept.

Ross Stores reported first-quarter revenue of $4.86 billion, an 8.1% year-on-year increase, meeting analysts' expectations. However, overall, the company's quarterly performance was mixed, with gross margins exceeding expectations but Q2 profit expectations falling short.

CEO Barbara Rentler commented, "We would like to do better. Despite the continued macroeconomic headwinds putting pressure on customers' discretionary spending, first-quarter sales remained in line with performance guidance. The earnings results for this quarter exceeded expectations, mainly due to lower expenses compared to the plan."

Due to the company's performance surpassing analysts' expectations, the stock has risen by 12.37% since the Q1 report was released, with the current stock price at $147.40.

Q1 Top Performer: Ollie's Bargain Outlet (OLLI.US) Discount retailer Ollie's Bargain Outlet is usually located in suburban or semi-rural shopping centers, where the retailer typically acquires excess inventory and then sells it at a discount. Ollie's reported Q1 revenue of $508.8 million, a year-on-year increase of 10.8%, in line with analysts' expectations. For the company, this was a solid quarter, with both gross margin and profit expectations exceeding analysts' forecasts.

The stock is set to release its earnings report before the market opens on August 29th Eastern Time. Compared to its peers, Ollie's has significantly raised its full-year expectations, increasing revenue expectations to $2.257 billion to $2.277 billion, up from the previous range of $2.248 billion to $2.273 billion. The market seems satisfied with this result, as the stock has risen by 169.43% since the Q1 report was released. As of last Friday, the stock closed up 1.58% at $95.94.

Weakest Performance in Q1: Five Below (FIVE.US)

US discount retailer Five Below often provides a treasure hunt shopping experience, selling a variety of products from phone cases to candies to sports equipment, mostly priced at $5 or lower.

Five Below reported Q1 revenue of $811.9 million, an 11.8% year-on-year increase, 2.7% lower than analysts' expectations, indicating a relatively weak Q1 performance.

The company is set to release its Q2 earnings report after the market closes on August 28th Eastern Time. Previously, the company's Q2 profit guidance was also disappointing, with revenue guidance below analysts' expectations. The company stated that based on opening approximately 60 new stores and assuming comparable sales will see a mid-single-digit decline, Q2 revenue is expected to be between $830 million and $850 million, with diluted earnings per share expected to be between $0.57 and $0.69.

While the company saw fast revenue growth in Q1, it was unable to offset the fact that the full-year guidance update was weaker. The company expects full-year revenue to be between $3.79 billion and $3.87 billion. As expected, the stock has fallen by 44.18% since the Q1 report was released, with the current price at $76.96.

Big Lots (BIG.US)

Big Lots is a discount retailer known for selling brand-name products, acquiring excess inventory and then selling it at lower discounts than traditional retailers.

Big Lots reported Q1 revenue of $1.01 billion, a 10.2% year-on-year decrease, 3% lower than analysts' expectations. Overall, it was a weak quarter, with the company's earnings and gross margin below analysts' expectations.

Big Lots also had the slowest revenue growth among its peers. Since the report was released, the stock has fallen by 71.6%, currently trading at $1. The stock is set to release its Q2 earnings report before the market opens on September 6th Eastern Time TJX Companies (TJX.US)

TJX is a discount retailer that sells branded clothing and other goods at significantly lower prices than department stores, originally based on a strategy of purchasing excess inventory from manufacturers or other retailers.

TJX reported Q1 revenue of $12.48 billion, a 5.9% year-on-year increase, in line with analyst expectations. More broadly, Q1 was a weaker quarter for the company's performance, and the full-year profit outlook is also disappointing. Since the report was released, the stock has risen by 11.7%, with the current price at $111.45