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ETF News And Commentary

Retail may not be one of the thriving sectors in Q2, but retailers’ earnings growth and beat ratio fared better than Q1. Total earnings from 91.3% of the sector’s total market capitalization reported so far are up only 2% on 5.6% revenue growth. This is, however, better than no earnings growth and 3.6% revenue growth in Q1.

Earnings surprises were predominantly zero for retailers, with only 44.1% of the companies beating earnings estimates, the second lowest in the S&P 500, and 52.9% beating revenues. Though earnings beat ratio is below the four-quarter average of 54.4%, this is higher than 38.2% in Q1 (read: Can Carl Icahn Revitalize Retail ETFs?).

This is because most of the retailers including Wal-Mart (WMT - Analyst Report), Macy’s (M - Analyst Report) and Target (TGT - Analyst Report) have seen modest price gains despite meeting or missing on bottom lines and guiding lower. Further, robust earnings beat by Home Depot (HD - Analyst Report), Lowe’s (LOW - Analyst Report) and Dicks Sporting Goods (DKS), as well as solid strength in Urban Outfitters (URBN) have been promising, propelling the stocks higher.

Retail Earnings in Focus

Home Depot, the world's largest home improvement retailer, emerged as the real champion in the Q2 earnings season as the stock climbed about 9% to date post its earnings announcement and touched a new 52-week high of $91.81 yesterday. The company surpassed the Zacks Consensus Estimate by 8 cents on earnings and by $241 million on revenues. Further, it raised its full-year earnings guidance from $4.42 to $4.52, which is well above the Zacks Consensus Estimate of $4.50, based on a strong spring selling season. This has spread an air of optimism in the entire retail sector.

LOW gained 3.6% in the last two trading sessions following its quarterly results that topped our earnings estimate by a couple of cents and revenue estimates by $70 million. The second largest home improvement retailer reaffirmed its full-year earnings guidance of $2.63, which is a penny ahead of our estimate, but trimmed its full-year sales growth outlook to 4.5% from 5%.   

Dicks Sporting Goods also added 2.6% as it beat the Zacks Consensus Estimate by couple of cents on earnings and by $35.9 million on revenues despite weak demand for its golf and hunting products. The sporting-goods retailer reiterated its earnings per share guidance of $2.70–$2.85 for fiscal 2014. The midpoint is higher than the Zacks Consensus Estimate of $2.76.

The specialty retailer, Urban Outfitters, met the Zacks Consensus Estimate of 49 cents on earnings but outpaced our estimate on revenues by $5.3 million. The shares of URBN are up 6.4% to date post earnings announcement.

Wal-Mart, the world's largest retailer, also matched the Zacks Consensus Estimate of $1.21 but revenues of $120.1 billion were well ahead of our estimate of $119.1 billion. The company slashed its full-year earnings guidance to $4.90–$5.15 per share from $5.10–$5.45. The midpoint is below the current Zacks Consensus Estimate of $5.04. Despite the weak guidance, shares of WMT are up nearly 2% to date post its earnings announcement (see: all the Consumer Discretionary ETFs here).

Another retailer, Target, saw a jump of 3.1% in its share price over the past two trading sessions despite uninspiring results and a reduced earnings outlook. Earnings met our estimate of 78 cents but revenues of $17,406 million fell short of our estimate of $17,437 million due to the aftereffect of a massive data breach. The company projects earnings per share in the range of 40–50 cents for the third quarter and cut the full-year guidance from $3.60–$3.90 to $3.10–$3.30. The current Zacks Consensus Estimate for the third quarter and fiscal 2014 are 48 cents and $3.19, respectively.

Finally, the second largest department store retailer – Macy’s – dampened investors’ mood with its sluggish quarterly results. Earnings per share of 80 cents and revenues of $6,267 million missed the Zacks Consensus Estimate of 86 cents and $6,294 million, respectively. Further, the company slashed its sales growth outlook for the full year to the range of 1.5–2% from 2.5–3%. Macy’s shares dropped 5.5% on the day of the earnings announcement but recovered fully, adding 1.6% to date post results.

ETFs in Focus

The strong performances by retailers have given a new lease of life to the retail ETFs, which were struggling with soft industry trends such as reduced consumer spending since the start of the year. Given this, investors could ride out the bullish sentiment in the space at least for the near term with the following three ETFs (read: A Comprehensive Guide to Retail ETFs).

PowerShares Retail Fund ((PMR - ETF report))

This retail fund provides diversified exposure across various market caps with 41% in large caps, 36% in small caps and the rest in mid caps. This is easily done by tracking the Dynamic Retail Intellidex Index. The fund has accumulated $20.2 million in its asset base while trades in a light volume of under 8,000 shares a day. The ETF charges 63 bps in fees per year.

In total, the product holds 29 securities with moderate concentration of 36.3% across the top 10 holdings. In terms of industrial exposure, specialty retail takes the top spot at 31%, followed by food retail (18%) and hypermarkets (13%). PMR was up 3.3% in the past 10 trading sessions and has a Zacks Rank of 2 or ‘Buy’ rating with a Medium risk outlook.

SPDR S&P Retail ETF ((XRT - ETF report))

This product tracks the S&P Retail Select Industry Index, holding 103 securities in its basket. It is widely spread across each component with none holding more than 1.19% of total assets. About 61% of the portfolio is dominated by small caps while the rest have been split between the other two market cap levels (read: Guide to Small Cap Growth ETFs Investing).

In terms of sector holdings, apparel retail takes the top spot with one-fourth share in the basket while specialty stores, automotive retail and Internet retail round off the next three spots. The fund has amassed about $740.4 million in its asset base and trades in heavy volume of more than 2.5 million shares per day. The ETF charges 35 bps a year in fees. XRT gained 4.2% over the past 10 trading sessions and has a Zacks ETF Rank of 3 or ‘Hold’ rating with Medium risk outlook.

Market Vectors Retail ETF ((RTH - ETF report))

This fund follows the Market Vectors US Listed Retail 25 Index and holds about 26 stocks in its basket with AUM of $72 million. Average daily volume is light at under 25,000 shares while expense ratio is at 0.35%. The product is a large cap centric fund and heavily concentrated on the top 10 holdings at 63.4% of assets with double-digit allocation to WMT.

Sector wise, specialty retail occupies the top position with less than one-third share, followed by double-digit allocation to hypermarkets, departmental stores, drug stores and health care services. RTH added about 5.5% over the past 10 days but has a Zacks ETF Rank of 4 or ‘Sell’ rating with a Medium risk outlook.

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