Companies Set to Chronicle Troughs of the Pandemic as They Report Earnings

By Dave Sebastian

Businesses are beginning to give investors their first, full look at the impact the coronavirus pandemic had on their balance sheets.

America's 500 largest public companies are expected to report a 44% drop in earnings for the second quarter when widespread lockdown orders ended a decadelong economic boom, according to analysts polled by FactSet. That compares with a 14.9% decline in the first quarter. The 44% decline, if manifested, would reflect the S&P 500's largest year-over-year drop in earnings since the fourth quarter of 2008.

The first three months of the year was a mix of a foregone period of growth and the economic turmoil that followed. Even though widespread shutdowns in the U.S. went into effect during the last few weeks of the first quarter, companies with a global footprint were jolted earlier in the year by a flood of Covid-19 cases in Asia and Europe.

Revenue of companies in the S&P 500 index rose 0.8% for the first quarter from the year-earlier period, according to FactSet. Between mid-March and the end of June, 390 of those companies collectively reported a quarterly net gain in revenue of at least $22 billion specifically related to the pandemic, according to data tracked by Dow Jones Newswires.

Still, finance chiefs threw in the towel on their expectations amid uncertainty, with more than 40% of S&P 500 companies pulling at least part of their guidance.

"The Q1 results were a best preview of coming attractions," said Sam Stovall, chief investment strategist at CFRA Research. "The main show is Q2."

Mr. Stovall said the second quarter could be the nadir of the recession. "You can rarely hurt yourself falling out of a basement window," he said.

Among the sectors with the biggest declines in revenue in the first quarter were energy and bricks-and-mortar retail -- with some high-profile bankruptcies -- and supply-chain dependent industries such as automotive and industrial goods, according to a Dow Jones Newswires analysis. Airlines, hotels, restaurants and cruise lines also suffered.

"Travel and tourism will grow, but not by reverting to what it was, but by adjusting to a world where all activities, everything we do in the world, will have changed," said Richard Fain, chief executive for Royal Caribbean Cruises Ltd. on a May earnings call.

Royal Caribbean, Carnival Corp. and Norwegian Cruise Line Holdings Ltd. forecast a full-year loss. The U.S. Centers for Disease Control and Prevention has extended its cruise sailing ban through the end of September.

A recent rebound in oil prices is helping some energy companies, while others, for example shale producers, continue to suffer because of high levels of debt.

Energy companies reported at least $17 billion less in combined revenue due to the pandemic, according to Dow Jones Newswires. U.S. oil and gas firms in Texas and the surrounding area don't expect global oil consumption to reach pre-coronavirus levels until next year or later.

Meanwhile, sectors that made staying at home easier, such as e-commerce and wholesale, were among those that posted gains, the data show.

Companies have reported stronger sales of goods required for shelter-in-place, from Campbell Soup Co. to laptop maker HP Inc. But those purchases in some cases didn't offset declines caused by lower activity outside the home. HP reported an 11% decline in sales for the quarter ended April 30, as it didn't sell as many office printers.

For drugmakers, the picture isn't perfect either. Johnson & Johnson in April reported a 3.3% sales increase for the first quarter but said a slowdown in elective-health procedures, such as hip replacements and spinal surgeries, hurt sales of medical devices. It guided for a sales decline for the year.

Animal-medicine company Zoetis Inc. said it expects a revenue hit in the second quarter because of lower traffic at its pet clinics and lower demand for some of its products, according to Chief Executive Kristin Peck.

Some retailers, such as Target Corp., said they benefited from government stimulus checks sent to many Americans. But whether the boost will continue is hard to predict.

"They're shopping in our stores, and we've seen store traffic increase," Target Chief Executive Brian Cornell said of such spending during the company's first-quarter earnings call in May.

He noted that Target's "ability to project how that's going to play out over the balance of the quarter or year is unfortunately something that we can't do today."

Nevertheless, companies will face tough questions from investors looking for more clarity, said Lauren Goodwin, a portfolio strategist at New York Life Investments. "This earnings season is tremendously important for setting the tone of market performance for the rest of the year," she said.

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