Weak Earnings Hurting Retail ETFs? [Merrill Lynch Retail HOLDRS ETF, SPDR S&P Retail (ETF)]

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May 27, 2014 4:07pm NYSE:PMR NYSE:RTH

retail etfRetailers saw a weak Q1 with total earnings from 97.3% of the sector’s total market capitalization reported so far being flat on 3.3% revenue growth. Earnings surprises were predominantly negative for retailers, with only 43.9% of the companies beating earnings estimates,

the lowest in the S&P 500, and an even lower 39.0% beating revenues.

Further, the retail sector has been the weakest among the 16 Zacks sectors in terms of price performance from a year-to-date look. This is especially true as the retail sector stocks in the S&P 500 are down over 5% versus over 3% gain for the S&P 500. Harsh winter, intense price competition and lower consumer income have taken a toll on the broad retail space.

In particular, lower-than-expected earnings from retailers like Wal-Mart (WMT), Staples (SPLS), Urban Outfitters (URBN) and Dicks Sporting Goods (DKS), and their sliding stock prices have been the major culprits, spreading bearishness in the retail sector on the whole.

However, modest price appreciation by Home Depot (HD) and Lowe’s (LOW) despite soft results as well as solid earnings beat by Tiffany & Company (TIF) and J. C. Penney (JCP) have been reassuring and managed to hold better than others.

Retail Earnings in Focus:

The Real Dampeners

Dicks Sporting Goods is the major loser as the stock has tumbled nearly 19% to date post its earnings announcement and touched a new 52-week low of $42.55 last week. The company missed the Zacks Consensus Estimate by 3 cents on earnings and $20 million on revenues. Further, the company cut its full-year earnings guidance from $3.03–$3.08 to $2.70–$2.85 on weak demand for its golf and hunting products. The midpoint ($2.78) is in line with the Zacks Consensus Estimate.

Shares of specialty retailer, Urban Outfitters, also fell about 10% and are currently hovering around its two-year low. This is because the company reported earnings per share of 26 cents, missing our estimate by a penny, and revenues of $686.3 million which fell shy of the Zacks Consensus Estimate of $688 million.

The U.S. largest office product retailer, Staples, has also fallen 13% to date post lackluster earnings results. Earnings per share came in at 18 cents, much below the Zacks Consensus Estimate of 21 cents but revenues of $5,654.0 million was above our estimate of $5,626.0 million (read: A Comprehensive Guide to Retail ETFs).

Retail Stocks Springing Surprises

Home Depot and Lowe’s, the world’s largest home improvement retailers, bucked the negative trend in the price performances despite lagging the Zacks Consensus Estimate on both earnings and revenues due to a slow start to spring selling season.

The shares of HD are up 1.6% post earnings announcement as the company raised its full year earnings guidance from $4.38 to $4.42 (midpoint $4.40), which is on par with the Zacks Consensus Estimate. LOW added 3.6% to date after its quarterly results and raised its full-year earnings guidance from $2.60 to $2.63, which is well above the Zacks Consensus Estimate of $2.59.

Shares of one of the leading jewelry retailers, Tiffany, have surged 16% to date as it comfortably topped our earnings estimate by 20 cents and revenue estimate by $59.1 million. Additionally, the company raised its earnings guidance from $4.05-$4.15 to $4.15–$4.25. However, the projection is far below the current Zacks Consensus Estimate of $4.27.

Struggling retailer – JCP – again surprised the market with improved sales and earnings numbers. The departmental store retailer posted loss of $1.16 per share on $2.8 billion in revenues, faring better than the Zacks Consensus Estimate of loss of $1.27 and revenue estimate of $2.7 billion. The stock is up 7.6% following its earnings announcement.

ETFs in Focus

The weak and strong performances by retailers have put retail ETFs in focus for the next few days. Investor seeking to tap the current beaten down prices in a diversified way could consider the following three ETFs. Any of these could be considered solid picks given that these have a favorable Zacks ETF Rank of ‘2’ or ‘3’ and retail fundamentals are improving.


This product tracks the S&P Retail Select Industry Index, holding 105 securities in its basket. It is widely spread across each component as none of these holds more than 1.46% of total assets. About half of the portfolio is dominated by small cap stocks while the rest have been split between the other two market cap levels (read: 3 Small Cap ETFs Outperforming the Russell 2000 Index).

In terms of sector holdings, apparel retail takes the top spot at one-fourth share in the basket while specialty stores, automotive retail and Internet retail have double-digit allocations. The fund has amassed about $680 million in its asset base and trades in heavy volume of nearly 3.2 million shares per day. The ETF charges 35 bps a year in fees. XRT was flat over the past 10 trading sessions and has a Zacks ETF Rank of 2 or ‘Buy’ rating with Medium risk outlook.

Market Vectors Retail ETF (NYSEARCA:RTH)

This fund follows the Market Vectors US Listed Retail 25 Index and holds about 26 stocks in its basket with AUM of $27.5 million. Average daily volume is light at under 39,000 shares while expense ratio is at 0.35%. The product is a large cap centric fund and heavily concentrated on the top 10 holdings with 63.4% of assets with largest allocations to WMT, Amazon.Com (AMZN) and HD.

Sector wise, specialty retail occupies the top position with less than one-third share, followed by double-digit allocation to hypermarkets, drug stores, departmental stores, and health care services. RTH added about 0.8% over the past 10 days and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook.

PowerShares Retail Fund (NYSEARCA:PMR)

This retail fund provides diversified exposure across various market caps with 39% in large caps, 34% in small caps and the rest in mid caps. This is easily done by tracking the Dynamic Retail Intellidex Index. The fund has accumulated $24.9 million in its asset base while trades in light volume of under 12,000 share a day. The ETF charges 63 bps in fees per year (read: ETFs to Watch on Rotten Whole Foods Earnings).

In total, the product holds 30 securities with moderate concentration of 45.8% across the top 10 holdings. In terms of industrial exposure, food retail takes the top spot at 21.53%, followed by automotive retail (15.89%) and drug retail (13.65%). PMR gained about 2% in the past 10 trading sessions and has a Zacks Rank of 3 with a Medium risk outlook.

This article is brought to you courtesy of Sweta Killa.

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