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The Q2 earnings picture for the retail sector is among the weakest this reporting cycle with results tracking below past quarters and leading to 0.5% negative price performance for the broad sector.

Total earnings from 90.8% of the sector’s total market capitalization reported so far are down 0.8% on 4.8% higher revenues with 77.4% of the companies beating on earnings and 80.6% exceeding top-line estimates. While earnings growth rate is unimpressive, the proportion of retailers beating revenue estimates is the third highest of all 16 Zacks sectors, behind only the conglomerates (83.3%) and technology (85.2%).

Positive earnings reports from Target (TGT - Free Report) , Nordstrom (JWN - Free Report) , Wal-Mart (WMT - Free Report) and Home Depot (HD - Free Report) offset some negativity of weak results from department stores like J.C. Penney (JCP - Free Report) , Macy’s (M - Free Report) , and Kohl’s KSS.

Let’s dig into the details of the earnings releases:

Earnings Sending Stocks Higher

Big-box retailer, Target, emerged as the real champion in the Q2 earnings season as the stock surged as much as 4.9% following robust second-quarter fiscal 2017 results on August 18. The company topped our estimates by three cents for earnings and by $147 million for revenues. It expects earnings per share in the range of 75-95 for the ongoing quarter and raised its outlook to $4.34-$4.54 from $3.80-$4.20 for the fiscal year. The Zacks Consensus Estimate at the time of earnings release was 78 cents for the third quarter and $4.42 for fiscal 2017 (read: Will Big-Box Retailers Push Up Retail ETFs in Q2 Earnings?).

Specialty retailer, Nordstrom, rose as much as 2.5% following second-quarter fiscal 2017 results. The company beat the Zacks Consensus Estimate for earnings by three cents and for revenues by $61 million. The company raised its lower end of its earnings per share guidance to $2.52-$3.00 from $2.75-$3.00 for fiscal 2017.

The Dampeners

One of the leading department store retailers, J.C. Penney, dampened investors’ mood as its share price plunged 19.9% following the earnings announcement on August 11. The company posted loss per share of 9 cents, wider than the Zacks Consensus Estimate of a loss of 6 cents. However, revenue came in higher than our estimate by $92 million. For fiscal 2017, the company continued to expect earnings per share in the range of 40-65 cents (see: all the Consumer Discretionary ETFs here).

The second-largest department store retailer, Macy’s tanked 10.8% following the earnings announcement on August 10, marking the biggest daily loss since January 5. Though the retailer beat our estimates for earnings by three cents and for revenues by $51 million, it reported drop in same-store sales, sparking concerns on the prospect of its turnaround before the crucial holiday season. For fiscal 2017, it continues to project sales decline of 3.2-4.3% and earnings per share in the range of $2.90-$3.15.

One of the leading departmental stores Kohl’s also had its worst day since January 8, falling 5.8% posting a bigger-than-expected drop in quarterly sales on August 10. Earnings per share beat the Zacks Consensus Estimate by a nickel and revenues came in slightly higher than our estimate by $6 million.

Home Depot, the world's largest home improvement retailer, beat on second-quarter fiscal 2017 earnings by three cents and on revenues by $267 million. For fiscal 2017, Home Depot raised the earnings per share guidance to $7.29 from $7.15, which represents 13% increase year over year. However, the stock dropped as much as 3.9% on the day of its earnings announcement on August 15.

The world's largest retailer, Wal-Mart, lost as much as 3.2% on August 17 on bleak guidance. It topped our earnings and revenue estimates by a penny and $646 million, respectively. The company raised the lower end of its fiscal 2018 earnings per share guidance to $4.30-$4.40 from $4.20-$4.40. The midpoint of the guidance was much below the Zacks Consensus Estimate of $4.37 at the time of earnings release (read: Consumer ETFs in Focus on Wal-Mart Earnings Beat).

ETFs in Focus

A slew of negative price reactions led to terrible trading in retail ETFs over the past 10 trading sessions. Below we have highlighted them in details:  

SPDR S&P Retail ETF (XRT - Free Report)

This product tracks the S&P Retail Select Industry Index, holding 98 securities in its basket with each accounting for less than 2% of assets. Apparel retail takes the top spot at 20.8% share while internet & direct marketing retail, specialty stores, and automotive retail round off the next three spots with a double-digit allocation each. The fund has amassed $257.9 million in its asset base and charges 35 bps in annual fees. The fund shed 5.3% over the past 10 days and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: More Pain Ahead for Retail ETFs?).

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 highly concentrated on the top firm – Amazon (AMZN - Free Report) – at 19.9% while other firms hold no more than 5.2% share. The ETF has a certain tilt toward specialty retail, which accounts for 26% share while internet & direct marketing (25%), drug stores (11%), hypermarkets (10%), and departmental stores (10%) round off the top five. The product has amassed $68.5 million in its asset base and charges 35 bps in annual fees. RTH shed 2.1% in the same period and has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.

PowerShares Dynamic Retail Portfolio (PMR - Free Report)

This fund follows the Dynamic Retail Intellidex Index. In total, the product holds 30 securities with each holding less than 5.5% of assets. In terms of industrial exposure, specialty retail takes the top spot at 34%, while food retail (17%), hypermarkets (13%) and drug stores (13%) round off the top three positions. The fund has accumulated just $13.2 million in its asset base and charges 63 bps in fees per year. It lost 3.3% over the past 10 days and has a Zacks ETF Rank #3 (Hold) 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 8.6% of assets. While broadline retailers and specialty retailers make up for a bigger chunk at 24.9% and 22.4%, respectively, food retailers & wholesalers round off the next spot with 14.8% share. FTXD has accumulated $1.9 million within 11 months of its debut and has an expense ratio of 0.60%. The ETF is down 1.8% over the past 10 days.

Amplify Online Retail ETF (IBUY - Free Report)

This ETF has attracted $89.3 million to its asset base since its debut in April last year. It offers global exposure to companies that derive 70% or more revenue from online and virtual retail by tracking the EQM Online Retail Index. The fund is home to 40 stocks that are widely diversified, with each holding no more than 5.5% of assets. The product charges 65 bps in fees per year and has lost 4.7% in the same time frame (read: Retail ETFs to Buy on Back-to-School Shopping Spree).
 

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