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Retailers have been facing tough times over the past couple of months due to a brutal winter which has dampened their sales numbers. In addition, aggressive discounts during the crucial holiday season have hurt the profits for most retailers.
 
Despite these challenging conditions, retailers have held up well and earnings were quite impressive. They have either easily managed to meet or beat the Zacks Consensus Estimate on the earnings front for the recently reported quarter. This has spread an air of optimism in the broad retail sector amid the string of negative economic data.
 
In particular, results from some major retailers like Home Depot (HD - Analyst Report), Lowe’s (LOW), Target (TGT - Analyst Report), J. C. Penney (JCP - Analyst Report) and Macy’s (M - Analyst Report) as well as their modest guidance have been reassuring this week (read: 3 Best Performing Consumer ETFs This Holiday Season).
 
Retail Earnings in Focus
 
Home Depot, the world's largest home improvement retailer, reported strong earnings of 73 cents beating the Zacks Consensus Estimate by 2 cents, but lower-than-expected revenues. For fiscal 2014, the company guided earnings per share increase of 16.5% to $4.38, which is in-line with the Zacks Consensus Estimate. Shares of HD gained nearly 5% over the two days following the earnings release (on February 25).
 
Shares of the second largest home improvement retailer – LOW – reported earnings of 31 cents matching our estimate. Revenues of $11,660 million climbed 5.6% year over year and surpassed the Zacks Consensus Estimate of $11,645 million. The company projects earnings per share to be roughly $2.60, much above the Zacks Consensus Estimate of $2.16. The stock jumped 5.4% on Wednesday after its quarterly results.
 
Another retailer, Target, also saw shares climbing 7% in the session following its report, as it topped on earnings by a nickel despite the massive data breach. However, revenues of $21,516 million fell 5.3% year over year and missed our estimates.
 
Still, the company expects earnings in the range of 60-70 cents per share for the first quarter and $3.85-$4.15 per share for the full year, both of which are below the Zacks Consensus Estimate of 89 cents and $4.29, respectively.
 
After the closing bell yesterday, the struggling retailer - JCP - surprised the market with improved sales and earnings numbers. The department store retailer posted loss of 68 cents on $3.78 billion in revenue, which fared better than the Zacks Consensus Estimate of loss of 79 cents (read: A Comprehensive Guide to Retail ETFs).
 
Further, the company expects same store sales to rise in the mid single digit for 2014 and gross margins to improve substantially. The improving results and encouraging outlook has sent JCP shares up over 13.5% at the close in after-market hours.
 
Last but not least, the second largest department store retailer – Macy’s – topped our estimate on the bottom line by 14 cents but fell short of the Zacks Consensus Estimate on the top line. The company reaffirmed its earnings per share guidance in the range of $4.40–$4.50 for fiscal 2014, at par with the Zacks Consensus Estimate. Macy’s shares rose over 9% in the two trading sessions following the earnings announcement (on February 25).
 
ETFs to Consider
 
Higher earnings and the surging stock prices put several consumer ETFs having the largest allocations to the retail sector in focus. Investors seeking to ride out the surge in the broad retail space could invest in the following three consumer ETFs (see: all the Consumer Discretionary ETFs here).
 
Any of these could be considered the best picks as these have the top Zacks ETF Rank of ‘1’ or ‘2’, suggesting that the trio would continue to outperform in the coming months.   
 
First Trust Consumer Discretionary AlphaDEX Fund (FXD - ETF report)
 
This is one of the popular and liquid ETFs in the consumer space with AUM of $859.7 million and an expense ratio of 0.70%. Volume is moderate as it exchanges nearly 327,000 shares a day. The fund follows an AlphaDEX methodology and ranks stocks in the space by various growth and value factors, eliminating the bottom ranked 25% of the stocks.
 
This approach results in a basket of 134 stocks that are invested across various market spectrums with mid caps (43%), large caps (39%) and small caps (18%). Each security holds less than 1.62% of assets. Specialty retail is the top sector with nearly one-fifth allocation, followed by media (13.38%), and hotels, restaurants & leisure (11.93%).
 
The ETF added over nearly 2.5% over the past five trading sessions and has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with High risk outlook.
 
SPDR S&P Retail ETF (XRT - ETF report))
 
This product targets just the retail corner of the broad consumer space by tracking the S&P Retail Select Industry Index. In total, the fund holds 103 securities in its basket that are widely spread across each component as none of these holds more than 1.51% of total assets. About half of the portfolio is dominated by small cap stocks while the rest have been split between the other two market cap levels.
 
In terms of sector holdings, apparel retail takes the top spot at one-fourth share in the basket while specialty stores and automotive retail round off to the next two spots. The fund has been able to manage assets worth $846.6 million and sees heavy volume of more than 3.2 million shares on average. The ETF charges 35 bps a year in fees.
 
XRT gained 2.34% over the past five trading sessions and has a Zacks ETF Rank of 2 or ‘Buy’ rating with ‘High’ risk outlook (read: Beat the Cold Weather with These Hot Sector ETFs).
 
S&P SmallCap Consumer Discretionary Portfolio (PSCD - ETF report)
 
For targeted exposure to the small cap segment of the consumer discretionary space, PSCD looks an intriguing option. This fund tracks the S&P SmallCap 600 Capped Consumer Discretionary Index, holding 101 stocks in its portfolio. Each security holds less than 4% of total assets (read: Time to Bet on This Small Cap Consumer ETF).
 
In terms of industry exposure, specialty retail takes the top spot with 30% share, followed by double-digit allocations to apparel and luxury goods, and restaurants. The product has amassed $112.7 million in AUM while it sees light volume of under 16,000 shares per day.
 
The ETF charges 0.29% in expense ratio and is up over 3% in the past five days. PSCD has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with ‘High’ risk outlook.
 
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