Discover Earnings Preview: Holiday Sales To Lift Cards Business

-3.83%
Downside
120
Market
116
Trefis
DFS: Discover Financial Services logo
DFS
Discover Financial Services

Discover Financial (NYSE:DFS) is scheduled to report earnings for the fourth quarter of 2014 on Wednesday, January 21. [1] We expect the rise in consumer spending during the period, driven by strong holiday season sales, to boost the company’s cards business. Also notable will be the impact of shifting patterns in consumer spending during the quarter. In the third quarter Discover’s net income rose 8% year-over-year to $644 million, but remained flat relative to the second quarter of 2014. [2] In this note we discuss the key trends that will likely impact the company’s earnings for the quarter. We have a price estimate of $64 for Discover’s stock, which is slightly higher than the current market price.

See our complete analysis of Discover Financial here

Improving Economic Indicators, Consumer Spending Not As Robust

During the last three months of 2014, consumer spending and retail sales increased in comparison to a year ago, but didn’t quite keep up with the strong improvement in major economic indicators in the country. The latest data released by the U.S. Department of Commerce pointed to positive trends on the consumer side. During October and November, disposable personal income continued to increase, while the unemployment rate – which was over 8% in 2012 – fell to a low of 5.6% in December. [3] On the other hand, personal savings as a percentage of disposable personal income decreased to 4.4% in November from 4.6% in October, signifying higher spending by consumers. [4] A look at the data from the Survey of Consumers conducted by University of Michigan, which is considered to be a benchmark reading on consumer confidence in the U.S. economy, also points to consistently improving sentiment from October to December 2014. [5]

Relevant Articles
  1. Up 14% YTD, What’s Next For Discover Financial Stock?
  2. Discover Financial Stock Is Undervalued
  3. Discover Financial Stock Is Fairly Priced At The Current Levels
  4. Discover Financial Stock To Edge Past The Revenue Consensus In Q1
  5. Discover Financial Stock Is Attractive At The Current Levels
  6. Discover Financial Stock To Beat The Earnings Consensus In Q4?

As for the holiday sales data, according to advanced estimates released by the U.S. Commerce department there was a rise of about 4% in retail and food services sales during the last three months of 2014. However it also reported a 0.9% decline in sales for December compared to November, mostly due to variation in consumer spending patterns this holiday season. Sales in November, however, were 0.4% higher than in the previous month. ((ADVANCE MONTHLY SALES FOR RETAIL AND FOOD SERVICES DECEMBER 2014, U.S. Department of Commerce)) Following Thanksgiving weekend, sales on Cyber Monday were 17% higher than the previous year. [6] [7] The period between October 31 and December 23 saw a 15% increase in online sales in the U.S. [8] A surge in online sales could turn out to be a good sign for credit card companies as consumers typically pay for these purchases with cards. [9] Overall we expect the credit card business to benefit from holiday season spending, but that growth might not turn out to be as robust as anticipated earlier.

View Interactive Institutional Research (Powered by Trefis):

Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research

Notes:
  1. Discover Q4 2014 Earnings Conference Call, Investor Relations []
  2. SEC 10-Q Filing, October 2014 []
  3. Labor Force Statistics from the Current Population Survey, Bureau of Labor Statistics []
  4. PERSONAL INCOME AND OUTLAYS, Bureau of Economic Analysis []
  5. Index of Consumer Sentiment, University of Michigan []
  6. Bricks-and-mortar sales edge lower at start of holiday season; online surges: data, Reuters []
  7. Cyber Monday Shatters Record, Huffington Post []
  8. Gift Shoppers Flocked to the Web, The Wall Street Journal []
  9. Shoppers Are Budget Savvy This Holiday Season, Discover Press Release []