Muted Retail Earnings Put These ETFs In Focus

retail-shoppingThe 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 prospective run.

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

Wal-Mart (WMT), 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).

Another retailer, Target Corp. (TGT) – 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, Gap Inc. (GPS), 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 its guidance.

Kohl’s Corporation’s (KSS) 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.’s (DLTR) third–quarter earnings and sales also failed to match the respective Zacks Consensus Estimate.

J. C. Penney Company Inc.’s (NYSE:JCP) 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 fourth quarter.

Consumer electronic retailer Best Buy Company, Inc. (BBY) also delivered a mixed bag performance by beating the bottom line but missing the top line. Meanwhile, Macy’s (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 Strength).

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 growth outlook by OECD all of which definitely have an adverse effect on their spending pattern.

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%.

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