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Retail ETFs in Focus Ahead of Big Box Q1 Earnings

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We are at the tail end of the Q1 earnings season as all sectors save retail have reported. The retail sector has seen about half of its total releases. Total earnings for the sector reported so far are up 26.1% on 14.9% revenue growth with 68.4% companies beating EPS estimates and 63.2% beating revenue estimates.

While the proportion of positive earnings and revenue surprises are on the lower side, the pace of growth is tracking above the historical periods. As a result, retail ETFs SPDR S&P Retail ETF (XRT - Free Report) , VanEck Vectors Retail ETF (RTH - Free Report) and PowerShares Retail Fund (PMR - Free Report) gained 2.4%, 4.4% and 3.1%, respectively, in the past month (read: US Retail Rise: ETFs in Focus).

The focus has now shifted to traditional brick-and-mortar retailers like Macy’s (M - Free Report) , Nordstrom (JWN - Free Report) , Wal-Mart (WMT - Free Report) and Home Depot (HD - Free Report) that are expected to report this week. Given that earnings are the most important drivers of stock performance, it is necessary to look at the expected surprise of these retailers. These have the potential to push the abovementioned ETFs upward or downward.

According to our surprise prediction methodology, a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) when combined with a positive Earnings ESP increases chances of an earnings beat. A Zacks Rank #4 or 5 (Sell rated) is best avoided going into the earnings announcement, especially when the company is seeing negative estimate revisions. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

A Peek into the Earnings Lined Up

Home Depot is slated to report earnings before the bell on May 15. The stock has a Zacks Rank #4 and an Earnings ESP of -0.36%. The company saw negative earnings estimate revision of a penny over the past seven days for the to-be-reported quarter but delivered a positive earnings surprise in each of the last four quarters, with an average beat of 2.88%. The stock has a VGM Score of B.

Macy’s has a Zacks Rank #3 and an Earnings ESP of +4.50%, indicating a reasonable chance of beating estimates this quarter. The stock witnessed positive earnings estimate revision of four cents for the to-be-reported quarter in the past seven days. Analysts raising estimates right before earnings — with the most up-to-date information possible — is a pretty good indicator of some favorable trends for Macy’s. Additionally, it delivered a positive earnings surprise of 0.28% in the last four quarters and has a VGM Score of A. The company is expected to report before the opening bell on May 16 (see: all the Consumer Discretionary ETFs here).

Nordstrom, which will likely report earnings on May 17 after the closing bell, has a Zacks Rank #3 and an Earnings ESP of +10.32%. Though the stock is expected to post year-over-year earnings decline of 2.33%, it delivered positive earnings surprises in three of the last four quarters with an average beat of 16.81%. It saw no earnings estimate revision over the past 30 days and has a VGM Score of A. 

Wal-Mart is scheduled to report on May 17 before market open. It has a Zacks Rank #3 and an Earnings ESP of +0.77%. The company delivered an average positive earnings surprise of 1.50% in the last four quarters and has seen positive earnings estimate revision by a penny over the past month for the to-be-reported quarter. Additionally, it has a VGM Score of A.

Conclusion

While the sector has an unfavorable Zacks Rank in the bottom 44%, some earnings surprises are in the cards. Most retailers witnessed positive earnings estimate revisions. So, the space will continue to see smooth trading in the days ahead (read: Q1 GDP Growth Beats Estimates: ETFs to Buy).

In particular, retail ETFs could stand out well as the funds can easily counter shocks from some of the industry’s biggest components, given their exposure to a number of firms in various types of industries like specialty retail, hypermarkets, drug stores, food retail, Internet retail and many others. Further, the ETFs mentioned above have favorable ranks. Notably, XRT has a Zacks ETF Rank #1, PMR has a Zacks ETF Rank #2 and RTH has a Zacks ETF Rank #3.

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