The U.S. retail sector is one of the key components of the
S&P 500 index accounting for the fifth largest market
capitalization level with 9.2% share. Also, the performance of
retailers is a key gauge of the consumer spending pattern. This
draws attraction toward the sector for a better understanding of
consumers' financial health as well as the stock market's
Q3 Earnings So Far
The sector now seems to have lost some of its shine seen in the
second quarter. So far, as much as 86.4% of the Retail sector's
total market capitalization is out with results. Total earnings
from the sector are up 8.1% on 3.6% lower revenues. Of the pack,
57.9% of the companies surpassed earnings expectations and 31.6%
beat top-line estimates.
The blended beat ratio for the sector, screening the ratio of
companies surpassing both earnings as well as revenue expectations
was also low at 18.4%. The rate was far below 26.3% in Q2 and below
the 4-quarter average of 32.9%.
The mixed response in the sector so far can be validated by some of
the latest earnings reports discussed below.
Results in Focus
), a bellwether in retailing, continues to exhibit a sluggish trend
even in the third quarter. While the retail giant managed to beat
the earnings per share estimate by a penny or 0.88%, it hobbled on
the sales front.
A gloomy consumer spending environment globally and currency
fluctuations was held responsible for this weak showing. To
reflect the latest underperformance, Walmart also guided down for
the full year (read:
The Comprehensive Guide to Retail ETFs
) - the operator of general merchandise and food discount stores in
the United States - also fell shy of the Zacks Consensus Estimate
both on the top and the bottom line and trimmed its guidance.
Competitive threats and lack of geographic diversity were deemed
responsible for this lackluster performance.
Yet another retail firm,
), lagged the Zacks Consensus sales estimate mainly due to sluggish
comps but beat earnings by a penny. Gross margin contracted 120
basis points. On a slightly positive note, the company reaffirmed
) missed both earnings and revenues estimates and lowered its
earnings guidance for the full year. Comps declined 1.6% during the
quarter compared to a 1.1% increase in the prior-year period.
Gross margin shrank 60 basis points.
Dollar Tree Inc.
) third-quarter earnings and sales also failed to match the
respective Zacks Consensus Estimate.
J. C. Penney Company Inc.'s
) loss of $1.81 per share fared better than the Zacks Consensus
Estimate of loss of $1.86. However, sales of $2.8 billion fell
short of the estimate while adjusted operating loss significantly
widened in Q3.
J. C. Penney now anticipates gross margin and comparable-store
sales to improve year over year as well as sequentially in the
Consumer electronic retailer
Best Buy Company, Inc.
) also delivered a mixed bag performance by beating the bottom line
but missing the top line. Meanwhile,
(M) - one of largest department stores - bucked this trend beating
the Zacks Consensus Estimate on both lines.
Macy's surpassed our estimate on both top and bottom lines also
remained upbeat on its holiday season business. Macy's also
provided full-year earnings guidance which is well-above our
estimated range (read:
Retail ETFs in Focus Following Macy's Q3
What's in Store?
Let's see how things are shaping up for this holiday season.
Consumers are buckled with concerns related to the likelihood of
another round of government shutdowns, potential Fed taper in early
2014 - if not this month-- sloth movement in the labor market and
the recent cut in global
by OECD all of which definitely have an adverse effect on their
For this reason, although the projection for U.S. growth is largely
unchanged from the prior forecast of OECD, we expect retailers'
earnings to nudge up 0.7% in Q4 while revenues to grow 2.6%.
A tough year-over-year comparison thanks to a shorter holiday
season and less number of weekends in the key time frame this
year will likely weigh on retailers' earnings. A leading provider
of shopper analytics - ShopperTrak -
holiday retail traffic to be 10% lower than the previous year.
Prevalence of extreme promotion offers despite lower gas prices
also affirms a muted consumer sentiment.
in the U.S. fell in November to 70.4 after a sharp decline in
October. The expectation index dropped to 69.3 in November from
72.2 recorded in October.
Prior to this, indices logged a sharp sequential decline in
October. As of November 7, 2013, the consumer confidence index was
hovering around the
3 Consumer ETFs in Focus on Sluggish Sentiment
However, the story is not entirely gloomy. Many retailers catering
to high-end customers held up pretty well ahead of the holiday
season. While things are a bit rocky for low-end customers since
the broader economy is still on its way to recovery.
The earnings picture can be showcased best by ETFs like
PowerShares Dynamic Retail ETF
Market Vectors Retail ETF
Vanguard Consumer Staples ETF
almost all of which have a sizeable allocation in Wal-Mart. Still
the funds seem to be less perturbed by the relatively
unenthusiastic retail earnings.
Thus, despite an unsteady scenario, identifying some future winners
from the sector would be a prudent idea for investors. We believe
the sector might come out from the bottleneck next year, suggesting
any of these funds might be worth a closer look.
PowerShares Retail Fund (PMR)
This fund provides exposure to the companies engaged in general
merchandise stores such as department stores, discount stores,
warehouse clubs and superstores by tracking the Dynamic Retail
Intellidex Index. The ETF has managed assets worth $40.3 million
and charges 63 bps in fees and expenses.
In total, the product holds 30 securities, which is somewhat
concentrated on its top 10 holdings with around half of the
exposure. In-focus Best Buy and Wal-Mart, each accounting for
4.85%, get places in the top 10.
PMR is a nice blend of Consumer staples and discretionary which
makes it open to some capital appreciation and a cushion against
PMR gained just 1% in November after accumulating all these
earnings results but is up 36.3% so far this year. The product has
a Zacks ETF Rank of 1 or 'Strong Buy' rating with a 'Medium' risk
the top Ranked ETFs here
Market Vectors Retail ETF (RTH)
This ETF tracks the Market Vectors US Listed Retail 25 Index,
giving investors exposure to the broad consumer discretionary
space. The fund holds about 26 stocks in its basket with AUM of
$40.6 million while charging a slightly higher fee of 35 bps per
year from investors.
The product has concentration risks in terms of individual holdings
with top 10 holdings accounting for more than 59% share. In-focus
Wal-Mart and Target Corp have respectively 8.30% and 4.62% of
allocation in the fund.
The fund gained 3% in November and was up 37% for the YTD time
frame. The product has a Zacks ETF Rank of 2 or 'Buy' with a 'Low'
Vanguard Consumer Staples ETF (VDC)
Managing an asset base of over $1.7 billion, this fund provides
exposure to a basket of 111 consumer stocks by tracking the MSCI US
Investable Market Consumer Staples 25/50 Index. The product charges
a low fee of 14 bps per year from investors (see
all the Consumer Discretionary ETFs here
The ETF is highly concentrated across its top 10 companies at
nearly 61% of the assets. Wal-Mart takes up the fourth spot
with around 7.0% exposure in the fund.
VDC gained just under 1.5% in November and delivered 23.1% so far
in 2013. The fund has a Zacks ETF Rank of 3 or 'Hold' rating with a
'Low' risk outlook.
Want the latest recommendations from Zacks Investment Research?
Today, you can download
7 Best Stocks for the Next 30 Days
Click to get this free report >>
PWRSH-DYN RETL (PMR): ETF Research Reports
MKT VEC-RETAIL (RTH): ETF Research Reports
TARGET CORP (TGT): Free Stock Analysis Report
VIPERS-CONS STA (VDC): ETF Research Reports
WAL-MART STORES (WMT): Free Stock Analysis
To read this article on Zacks.com click here.
Want the latest recommendations from Zacks
Investment Research? Today, you can download 7 Best Stocks for the
Next 30 Days. Click to get this free report