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Retail ETFs in Trouble With No Q4 Surprise in Store

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Retail has been a weak sector so far this year hammered by the disappointing holiday sales and a high number of store closures. This has swept away all the positive sentiments arising from the new President’s proposed policies that would encourage consumer spending.


In particular, traditional brick and mortar as well as departmental store retailers like Macy's (M - Free Report) , Kohl's (KSS - Free Report) , J.C. Penney , Target (TGT - Free Report) and Tiffany took a major hit from the stiff online competition, slow mall traffic, and strong dollar. Additionally, most of the retailers revised their estimates down for the to-be reported holiday quarter and the full year (read: ETFs & Stocks Unfazed by Softer December Retail Sales).

That said, the retail sector is expected to report earnings decline of 1% for Q4 compared with the gain of 7.3% in Q3, as per our latest Earnings Preview. However, total earnings for 54.9% of the sector’s total market cap reported so far are up 6.4% from the same period last year on 7.1% revenue growth. Earnings and revenue beat ratios are lower at 57.9% and 21.1%, respectively.

This has led to mixed trading in retail ETF space so far with SPDR S&P Retail ETF (XRT - Free Report) , and PowerShares Retail Fund losing 0.3% and 1.5%, respectively, this year and VanEck Vectors Retail ETF (RTH - Free Report) gaining 3.8%. XRT and RTH have a Zacks ETF Rank of 1 or ‘Strong Buy’ rating while PMR has a Zacks ETF Rank of 2 or ‘Buy’ rating, suggesting that these could outperform in the coming weeks as more Q4 earnings unfolds (read: Trump Loving ETFs & Stocks for Valentine's Day).

Let’s delve into the earnings picture of some retailers that are likely to report next week and have the potential to push the space and ETFs upward or downward in the coming days.   

A Peek into Earnings Surprises

Reports from Home Depot (HD - Free Report) , Wal-Mart (WMT - Free Report) , Macy’s, Kohl’s, Nordstrom (JWN - Free Report) , Foot Locker (FL - Free Report) and J.C. Penney will be crucial for the sector next week.

Both Home Depot and Macy’s are slated to report earnings before the bell on February 20. Home Depot has a Zacks Rank #3 (Hold) and Earnings ESP of 0.00%, making surprise prediction difficult. The company delivered a positive earnings surprise in each of the last four quarters, with an average beat of 3.90%. The stock has a VGM Style Score of B. Meanwhile, Macy’s has a Zacks Rank #3 and Earnings ESP of -3.50%, indicating less chances of beating estimates this quarter.  It delivered positive earnings surprises in three of the last four quarters with an average beat of 1.04% and has a VGM Style Score of D.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Wal-Mart is also schedule to report on February 21 before market open. It has a Zacks Rank #4 (Sell) and an Earnings ESP of +0.77%. According to the our surprise prediction methodology, stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP are likely to beat earnings estimates, while a Zacks Rank #4 or 5 (Sell rated) are best avoided. The company delivered an average negative earnings surprise of 1.61% in the last four quarters. However, the stock has a top VGM Style Score of A.

Kohl’s has a Zacks Rank #5 (Strong Sell) and an Earnings ESP of -3.01%. However, it delivered a positive earnings surprise in three of the last four quarters, with an average beat of 6.19 and has a top VGM Style Score of B. The company is expected to report before the opening bell on February 23 (see: all the Consumer Discretionary ETFs here).

Nordstrom is also slated to report on February 23 but after the closing bell. It has a Zacks Rank #3 and an Earnings ESP of -2.61%, indicating less chances of beating estimates this quarter. The company delivered a positive earnings surprise in two of the last four quarters, with an average beat of 9.26%. The stock has a VGM Style Score of A.

Foot Locker and J.C. Penney have a Zacks Rank #4 and an Earnings ESP of 0.00%. Both stocks delivered an average positive earnings surprise of 1.99% and 42.12%, respectively, in the last four quarters and have a VGM Style Score of C. The duo is likely to report earnings on February 24 before the opening bell.

Given no earnings surprise prediction and unfavorable Zacks Rank, it seems that the space might continue to see rough trading in the days ahead.

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