Macy’s, Inc. (M) Q3 Strength Puts These Retail ETFs In Focus

retail etfThe festive mood seems to have set in with robust third quarter (ending November 2) results from one of the bellwethers in the retail world, Macy’s (NYSE:M).

The retailer rebounded strongly from its only profit miss in 25 quarters, suggesting strong demand heading into the holiday season. Macy’s is the first major retailer to release its earnings results and can be considered a barometer of consumer spending.

Macy’s Earnings in Focus

The second largest department store retailer surpassed our estimate on both top and bottom lines. Earnings per share came in at 47 cents that strongly beat the Zacks Consensus Estimate of 38 cents and the year-ago earnings of 36 cents (read: Is This ETF a Better Bet in the Consumer Space?).

Revenues rose 3.3% year-over-year to $6,276 million and were well ahead of the Zacks Consensus Estimate of $6,183 million. The impressive performance was driven by discounts and advertising. Comparable sales grew 3.5% in the last quarter despite softer-than expected back-to-school sales and a two-week government shutdown.

Macy’s continues to expect comparable sales growth in the range of 2.5%–4% for the second half and 2%–2.9% for the fiscal year. Earnings per share are expected to be $3.80–$3.90 for the full year, which is well above our estimate of $3.77.

Market Impact

Driven by the earnings beat and optimistic outlook for the holiday season, Macy’s shares jumped 9.4% at close in regular trading yesterday on elevated volume. This outperformance has spread optimism across the broad retail sector with stocks of other players in the space in green at the close of the day.

These players include J. C. Penney (JCP) – up 3.58%, Nordstrom (JWN) – up 2.52%, Target (TGT) – up 2.19%, Limited Brands (LTD) – up 1.90%, Home Depot (HD) – up 1.86%, Gap Inc. (GPS) – up 1.20%, Kohls (KSS) – up 1.15%, Best Buy (BBY) – up 0.50% and Wal-Mart (WMT) – up 0.24%.

ETFs to Consider

Given the strength in Macy’s and the broad retail sector in particular, the following three ETFs could be worth a look by investors seeking to ride out the surge in the broad retail space this holiday season.

The trio looks to have the highest allocation to Macy’s, and other major retailers, and look to be in focus in the coming days with room for upside. The trio has a top Zacks ETF Rank of ‘1 or 2’ and could be interesting picks for investors (see: all the Consumer Discretionary ETFs here):

SPDR S&P Retail ETF (XRT)

This is the most popular ETF in the retail space with AUM of nearly $1.1 billion and average daily volume of 3.3 million shares. The fund tracks the S&P Retail Select Industry Index, holding 97 stocks in its portfolio. The ETF is well spread across each security as none of them holds more than 1.44% of assets, thereby eliminating company-specific risk.

In term of sectors, apparel retail takes the top spot at one-fourth share in the basket while specialty stores and automotive retail round off to the next two spots. The product has a certain tilt toward small caps with 45% of assets, followed by large (28%) and mid (27%) caps. The ETF charges 35 bps a year in fees.

The fund gained 1.31% yesterday while it is up nearly 39% in the year-to-date time frame. XRT has a Zacks ETF Rank of 2 or ‘Buy’ rating with ‘High’ risk outlook.

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