Wal-Mart Stores, Inc. (WMT) Drags Down Consumer ETFs

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September 26, 2013 5:52pm NYSE:RTH NYSE:VDC

walmartShares of Wal-Mart Stores, Inc. (NYSE:WMT), the world’s number one retailer, tumbled recently on news that the company is cutting orders from suppliers for the current quarter and fourth quarter.

The reason cited for such action was considered to be rising inventory levels. The news also impacted rivals Costco (COST)and Target (TGT) (Retail Earnings Drag Down Consumer ETFs).

However, the company officials confronted such reportage and stated that it was misleading and the company is has been managing its inventory level constantly.

Investors should note that in the second quarter, inventory of Wal-Mart increased 6.9%. This was attributable to weak sales trends, the delay in summer weather and timing shifts in the receipt of merchandise for back to school and the upcoming holidays.

Impact on ETFs

Wal-Mart accounts for a big chunk of the holdings in many of the top ETFs in the sector. This includes an 8.87% allocation to the firm in the Market Vectors Retail ETF (NYSEARCA:RTH). Beyond this, the Consumer Staples Select Sector SPDR (XLP) and the Vanguard Consumer Staples Fund (VDC) also allocate at least 8.01% and 7.52%, respectively, to Wal-Mart while a few others also give the company at least a 5% weight.

RTH which consists of 26 stocks, appears to be trading on lower volume compared to average daily volume. Apart from Wal-Mart Stores Inc., the top holdings of the company include Home Depot, Inc. and Amazon.com Inc., representing asset allocation of 9.5% and 7.9%, respectively.

The fund’s expense ratio is 0.35% and the dividend yield is 1.52%. RTH has managed to attract $43 million in assets under management.

XLP, the largest staples ETF by assets also showed a downward movement on the news. This fund consists of 42 stocks of companies that manufacture and sell a range of branded consumer packaged goods, with the top holdings being Procter & Gamble Co. (PG), The Coca-Cola Co. (KO) and Philip Morris International Inc (PM).

The fund’s expense ratio is 0.18% and it pays out a dividend yield of 2.72%. XLP has about $5.3 billion in assets under management.

A look at Future Earnings Expectation of Wal-Mart

The company sharply lowered its net sales growth guidance from a range of 5%-6% to a range of 2%-3% due to weaker-than-expected performance in the first half. Moreover, the challenging sales environment as well as currency headwinds are expected to hurt the second half sales as well.

Wal-Mart also lowered its earnings expectations from a range of $5.20 to $5.40 to $5.10 and $5.30 per share (The Comprehensive Guide to Retail ETFs).

For the third quarter of fiscal 2014, Wal-Mart expects its earnings to range between $1.11 and $1.16 per share. Wal-Mart expects U.S. comp sales to be relatively flat for the 13-week period ending October 25, much lower than last year quarter’s growth of 1.5%.

Currently, Wal-Mart has a Zacks Rank #4 (Sell), suggesting that more underperformance is in the company’s future, especially considering that the stock has a negative ESP (-0.89%).

Bottom Line

Wal-Mart, and other big name retailers, could be in trouble this earnings season. There are some questions as to whether the consumer will continue to spend, while the earnings estimate trend isn’t too favorable either.

Given this, investors should definitely pay close attention to consumer ETFs that have big allocations to Wal-Mart, or those that engage in consumer product sales. These could be in for a rocky ride this earnings season, and may be in for a bit of trouble if the recent moves in the Zacks Rank for these stocks are any guide.

This article is brought to you courtesy of Eric Dutram.

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