Though retailers were off to a great start to the Q1 earnings season with encouraging results from restaurateurs, drugs retailers and online operators, a combination of factors including a strong dollar, weather issues, and the West Coast port congestion lately took a toll on the reports of the departmental stores and big-box retailers (read: West Port Congestion to Hurt These ETFs ).
Total earnings from 90.2% of the sector's total market capitalization reported so far are up 4.7% on revenue growth of 5.4%, with 73% beating earnings estimates and 48.6% beating on the top line. While the earnings growth rate, earnings and revenue surprises are below Q4, the revenue growth rate is slightly higher.
In particular, lower-than-expected earnings and revenues from the retailers such as Lowe's ( LOW ) and Macy's ( M ) as well as sluggish revenue numbers from Wal-Mart ( WMT ) and Gap Inc. ( GPS ) dampened investors' mood. In addition, earnings beat from J. C. Penney ( JCP ) and Home Depot ( HD ) were unable to fuel optimism into the sector, pushing the stocks down. The series of disappointing performances swept away the positive impact from Target ( TGT ) and Best Buy ( BBY ).
The Major Dampeners
One of the leading department store retailers - JCP - is one of the major dampeners as the stock dropped 9.5% following its earnings announcement. The company reported a loss of 57 cents per share, narrower than the Zacks Consensus Estimate of loss of 79 cents but revenues of $2.86 billion fell slightly short of our estimate of $2.87.
Shares of Wal-Mart , the world's largest retailer, fell about 5% following the earnings announcement after the company met our earnings estimate and missed on revenues as higher wages, increased spending on online operations and a strong dollar took a toll on its results. The mega-retailer expects earnings of $1.06-$1.18 and $4.70-$5.05 per share for the second quarter and full year, respectively. The mid-point of both projections is short of the Zacks Consensus Estimate of $1.17 for the second quarter and $4.86 for the full year (read: Wal-Mart Earnings Disappoint: ETFs to Watch ).
The second largest home improvement retailer, LOW , slid 4.3% after it reported lower-than-expected results. Earnings of 70 cents per share and revenues of $14.1 billion were well below the Zacks Consensus Estimate of 74 cents and $14.2 million, respectively. For fiscal 2015, the retailer reiterated its revenue growth outlook of 4.5-5% and earnings guidance of $3.29. The Zacks Consensus Estimate was pegged at $3.32 at the time of earnings release.
The second largest department store retailer - Macy's - reported earnings per share of $2.44 and revenues of $6.2 billion that missed our estimates by a nickel and $89 million, respectively. The company expects earnings per share of $4.70-$4.80 for the current fiscal year; the mid-point of which is lower than the Zacks Consensus Estimate of $4.74 at the time of earnings release. The stock was down 3.2% following the earnings announcement.
Gap met our earnings estimate of 56 cents but revenues of $3.66 billion came in much below the Zacks Consensus Estimate of $3.7 billion. The company reaffirmed its earnings guidance of $2.75-$2.80 per share for the fiscal year; the midpoint of which is in line with the current Zacks Consensus Estimate of $2.78. The stock was down 1.7% in response to its soft results (see: all the Consumer Discretionary ETFs here ).
Home Depot , the world's largest home improvement retailer, beat the Zacks Consensus Estimate by a penny on earnings and by $116 million on revenues. It raised its annual revenue growth outlook from 3.5-4.7% to 4.2-4.8% for 2015. Additionally, earnings per share are also expected to increase 11-15% to $5.11 to $5.17 versus the previous growth forecast of 8.5-10% growth and earnings of $5.11 to $5.17 per share. The current Zacks Consensus Estimate is pegged at $5.24. Despite the solid results and increased outlook, shares of HD were off about 2% on the day of earnings release.
Retail Stocks Springing Surprises
The big-box retailer, Target , cheered investors with better-than-expected results and a raised guidance. The stock gained nearly 2% in response to the solid earnings. Earnings per share of $1.10 and revenues of $17.12 billion outpaced the Zacks Consensus Estimate of $1.03 and $17.08 billion, respectively. Target projects earnings per share in the range of $1.04-$1.14 for the ongoing second quarter and $4.50-$4.65 per share for full year. The Zacks Consensus Estimate was pegged at $1.12 for the second quarter and $4.55 for the full year at the time of earnings release.
Best Buy , the largest U.S. electronics chain, gained nearly 1.6% following its solid Q1 results. Earnings of 37 cents per share and revenues of $8.56 billion came ahead of the Zacks Consensus Estimate of 29 cents and $8.52 billion, respectively.
ETFs in Focus
The mixed performances have put retail ETFs in focus for the next few days. Investors could closely monitor the movement in the products and could tap the potential surge through ETFs. Below are three funds that could be solid picks for investors given that these have a favorable Zacks ETF Rank with a Medium risk outlook amid soft trends (read: Retail ETFs in Focus Ahead of Big-Box Earnings ).
SPDR S&P Retail ETF ( XRT )
This product tracks the S&P Retail Select Industry Index, holding 103 securities in its basket. It is widely spread across each component as none of these holds more than 1.45% of total assets. Small cap stocks dominate more than half of the portfolio while the rest have been split between the other two market cap levels.
In terms of sector holdings, apparel retail takes the top spot with nearly one-fourth share while specialty stores, Internet retail and automotive retail also have double-digit allocation each. XRT is the most popular and actively traded ETF in the retail space with AUM of about $1.3 billion and average daily volume of more than 2.3 million shares. It charges 35 bps in annual fees and was relatively flat over the past 10 days. The fund has a Zacks ETF Rank of 2 or 'Buy' rating.
Market Vectors Retail ETF ( RTH )
This fund tracks the Market Vectors US Listed Retail 25 Index and holds about 26 stocks in its basket. It is a large cap centric fund and is heavily concentrated on the top 10 holdings with 63.9% of assets. The largest allocations go to Amazon.com ( AMZN ), Wal-Mart, and HD. Sector wise, specialty retail occupies the top position with less than one-third share, followed by a double-digit allocation each to hypermarkets, drug stores, departmental stores, and health care services (read: Amazon's Q1 Beat Might Benefit These ETFs ).
The fund has amassed $356.3 million in its asset base while average daily volume is good at less than a million shares. Expense ratio came in at 0.35%. The product lost 0.2% over the past 10 days and has a Zacks ETF Rank of 1 or 'Strong Buy' rating.
PowerShares Retail Fund ( PMR )
This retail fund provides diversified exposure across various market caps with 47% in small caps, 35% in large caps and the rest in mid caps. This is easily done by tracking the Dynamic Retail Intellidex Index. The fund has accumulated just $31 million in its asset base while trades in light volume of about 15,000 shares a day. The ETF charges 63 bps in fees per year.
In total, the product holds 30 securities with none accounting for more than 5.4% of assets. In terms of industrial exposure, specialty retail takes the top spot at 30%, while food retail (19%) and department stores (15%) round off the top three positions. PMR is down 1.5% over the past 10 days and has a Zacks ETF Rank of 3 or 'Hold' rating.
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 >>
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