Thanks to a shift in consumer behavior, the retail sector has been witnessing a higher number of store closures. With a digital transformation in shopping and consumers splurging online, foot and mall traffic has been hit hard. As a result, most retailers including big-box are struggling to compete with e-commerce channels and are being forced to close their doors (read: Have Q4 Earnings Really Hurt Retail ETFs?).
Store Closures in Focus
Thousands of mall-based stores are shutting down with more closures lined up for the coming years. If this trend continues, it could be one of the biggest waves of retail closures in decades. Let’s have a look at some of the noteworthy retailers and their closure plans.
Big departmental stores like JC Penney JCP is in the process of shuttering 130–140 stores over the next few months while Macy's M is closing 63 stores this spring. The fellow department store Sear Holdings will close 109 Kmart stores and 41 of its namesake Sears outlets this year.
Office Depot ODP expects to shut down 75 stores this year after closing 123 in the last. Similarly, Staples SPLS also plans to close 70 stores this year after 48 shutdowns last year. Athletic shoes and apparel retailer Foot Locker (FL - Free Report) closed 51 stores in the fourth quarter and plans to close 100 more in 2017 while the high-end jeweler Tiffany TIF will shutter six outlets this year. Drug store retailer CVS Health (CVS - Free Report) is also in the process of closing 70 stores due to uncertainty surrounding the Affordable Care Act.
Some retailers are exiting the brick-and-mortar business altogether to shift to an all-online model. In this regard, women’s clothing retailer The Limited closed all its brick-and-mortar stores early this year but is currently operating as an online retailer and women's apparel retailer Bebe is in the process of closing all 170 stores to focus on growing online sales (read: What Made Internet ETFs Outperform in the Bull Market).
Other mall retailers like Aeropostale, American Eagle Outfitters (AEO - Free Report) , The Children’s Place (PLCE - Free Report) , Chico’s (CHS - Free Report) , Finish Line (FINL - Free Report) , and Men’s Wearhouse are all expected to close stores this year as well.
The massive store closures have spread pessimism across the broad sector as it is expected to have a huge impact on its revenue and profitability, making 2017 a bad year. In fact, the retail sector is expected to be one of the biggest laggards of the S&P 500 index in Q1 earnings, with a likely decline of 4.7%, as per the latest Earnings Preview.
Overall, the retail sector has the lowest Zacks Sector Rank with only 16% of the industries having a rank in the top 30%. Further, the sector saw more of negative earnings estimate revision in recent past, indicating a bearish outlook for the sector and negative investor sentiment (read: Consumer ETFs & Stocks Not Hurt by Soft February Retail Sales).
ETFs in Focus
As a result, investors should keep a close eye on retail ETFs and should remove them from their portfolio if the stocks continue to drag them down.
SPDR S&P Retail ETF (XRT - Free Report)
This product tracks the S&P Retail Select Industry Index, holding 103 securities in its basket with none accounting for more than 1.41% of assets. Apparel retail takes the top spot at one-fourth share while Internet retail, specialty stores, and automotive retail round off the next three spots with a double-digit allocation each. The fund has amassed $446.1 million in its asset base and charges 35 bps in annual fees. The fund has shed 6.3% so far this year and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook (read: Sector ETFs to Win or Lose Post Jobs Data).
PowerShares Retail Fund (PMR - Free Report)
This fund follows the Dynamic Retail Intellidex Index. In total, the product holds 30 securities with none holding more than 5.3% of assets. In terms of industrial exposure, specialty retail takes the top spot at 45%, while food retail (14%) and hypermarkets (13%) round off the top three positions. The fund has accumulated just $13.8 million in its asset base and charges 63 bps in fees per year. It has lost 4% in the year-to-date timeframe and has a Zacks ETF Rank of 3 with a Medium risk outlook.
VanEck Vectors Retail ETF (RTH - Free Report)
This fund provides exposure to the 26 largest retail firms by tracking the MVIS US Listed Retail 25 Index. It is heavily concentrated on the top firm – Amazon (AMZN) – at 17.1% while other firms hold less than 8.4% of assets. The ETF has a certain tilt toward specialty retail, which accounts for 29% share while Internet retail (22%), hypermarkets (12%), healthcare services (10%), and drug stores (10%) round off the top five. The product has amassed $63.9 million in its asset base and charges 35 bps in annual fees. RTH is up 2.6% so far this year and has a Zacks ETF Rank of 2 or ‘Buy’ rating with a Medium risk outlook.
First Trust Nasdaq Retail ETF (FTXD - Free Report)
The fund follows the Nasdaq US Smart Retail Index and holds 50 stocks in its basket. It is moderately concentrated across components, with each firm holding less than 8.1% of assets. While specialty retailers and broadline retailers make up for a bigger chunk at 26.3% and 22.6%, respectively, apparel retailers, and home improvement retailers round off the next two spots. FTXD has accumulated $2.0 million within six months of its debut and has an expense ratio of 0.60%. The ETF has lost 3.1% so far this year (see: all the Consumer Discretionary ETFs here).
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