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Have Q4 Earnings Really Hurt Retail ETFs?

Sweta Killa

The retail sector has been one of the worst-performing sectors this year hammered by the disappointing holiday sales and a high number of store closures. However, better-than-expected results from some of retailers like Wal-Mart WMT, Macy’s M, Lowe’s LOW, Home Depot HD and Nordstrom JWN pushed the stocks higher, instilling some confidence back into the sector. However, Target TGT and J.C. Penney JCP remained the drags on the sector.

Notably, Q4 earnings from 95.2% of the sector’s total market capitalization reported so far are up 1.7% on 4.2% higher revenues with 66.7% of the companies beating on earnings and 36.1% exceeding the top-line estimates. Both growth rates and beat ratios are unimpressive, resulting in a 0.1% negative price performance for the broad sector, as per the latest Earnings Trend report.

Let’s dig into the details of the earnings releases:

Earnings Sending Stocks Higher

The second-largest home improvement retailer, Lowe’s, emerged as the real champion in the Q4 earnings season as the stock surged as much as 11.4% following robust fourth-quarter fiscal 2016 results on March 1. The company topped our earnings estimates by seven cents and revenue estimates by $504 million. Additionally, the company provided upbeat earnings per share guidance of $4.64, higher than the Zacks Consensus Estimate of $4.52 provided at the time of earnings release.

The world's largest retailer, Wal-Mart, jumped 4.2% following solid fourth-quarter fiscal 2017 results on February 21. The company edged past our earnings estimates by a penny and revenue estimates by $386 million. Additionally, the mega retailer provided earnings per share guidance in the range of $0.90–$1.00 for the ongoing second quarter and $4.20-$4.40 for fiscal 2018 (read: Is Wal-Mart's Upbeat Q4 a Godsend for Consumer ETFs?).

Home Depot, the world's largest home improvement retailer, cheered investors with better-than-expected fiscal Q4 results. The company beat on earnings by 11 cents and on revenues by $401 million. For fiscal 2017, Home Depot provided earnings per share guidance of $7.13, which represents 10.5% increase year over year. The stock gained as much as 1.8% on the day of its earnings announcement on February 21.

The second-largest department store retailer, Macy’s, also saw its share price gaining as much as 3.7% following the earnings release on February 21. It topped our earnings estimate by a nickel but lagged the revenue estimate by $70 million. For fiscal 2017, the company projects earnings per share in the range of $2.90–$3.15. The mid-point of the guidance was much lower than the Zacks Consensus Estimate of $3.11 at the time of the earnings release.

Specialty retailer, Nordstrom, popped up 7% following solid fourth-quarter fiscal 2016 results. Though the company beat the Zacks Consensus Estimate for earnings by a huge 24 cents, revenues fell short of our estimate by $43 million. The company expects earnings per share in the range of $2.75–$3.00 for fiscal 2017, the mid-point of which was well above the Zacks Consensus Estimate of $2.91 at the time of the earnings release.

The Real Dampeners

Big-box retailer, Target, is the major loser as the stock tumbled as much as 14.4% following the earnings announcement on February 28. The retailer lagged our estimates for earnings by a nickel and for revenues by $56 million. Further, it disappointed investors with its downbeat guidance for the fiscal first quarter and 2017. Earnings per share are expected in the range of $0.80–$1.00 for the quarter and $3.80–$4.20 for the year. The Zacks Consensus Estimate at the time of earnings release was pegged at $1.30 for the first quarter and $5.29 for fiscal 2017.

One of the leading department store retailers, J.C. Penney, plunged as much as 10% following the earnings announcement on February 24. Though the company topped our bottom-line estimate by three cents, it missed on revenue by $10 million. For fiscal 2017, the company projects earnings per share in the range of 40–65 cents, the mid-point of which was much above the Zacks Consensus Estimate of 49 cents at the time of earnings release (see: all the Consumer Discretionary ETFs here).

ETFs in Focus

Fourth-quarter earnings led to mixed trading in retail ETFs over the past 10 trading sessions. Below we have highlighted them in details:  

SPDR S&P Retail ETF XRT

This product tracks the S&P Retail Select Industry Index, holding 102 securities in its basket with none accounting for more than 1.45% of assets. Apparel retail takes the top spot at 22.6% share while internet & direct marketing retail, specialty stores, and automotive retail round off the next three spots with a double-digit allocation each. The fund has amassed $286.6 million in its asset base and charges 35 bps in annual fees. The fund shed 2.2% over the past 10 days and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook.

VanEck Vectors Retail ETF RTH

This fund provides exposure to the 26 largest retail firms by tracking the MVIS US Listed Retail 25 Index. It is highly concentrated on the top firm – Amazon (AMZN) – at 17.19% while other firms hold less than 8.2%. The ETF has a certain tilt toward specialty retail, which accounts for 28% share while Internet retail (22%), hypermarkets (10%), healthcare services (10%) and drug stores (10%) round off the top five. The product has amassed $96.5 million in its asset base and charges 35 bps in annual fees. RTH added 0.3% in the same period and has a Zacks ETF Rank of 2 or ‘Buy’ rating with a Medium risk outlook (read: Retail Sales Rebound in January: ETF & Stock Picks).

PowerShares Dynamic Retail Portfolio PMR

This fund follows the Dynamic Retail Intellidex Index. In total, the product holds 30 securities with each holding no more than 5.1% of assets. In terms of industrial exposure, specialty retail takes the top spot at 48%, while food retail (17%), drug stores (11%) and departmental stores (9%) round off the top three positions. The fund has accumulated just $21.6 million in its asset base and charges 63 bps in fees per year. It shed 0.6% over the past 10 days and has a Zacks ETF Rank of 3 with a Medium risk outlook.

Amplify Online Retail ETF IBUY

This ETF has already attracted $10.2 million to its asset base since its debut less than a year ago. It offers global exposure to companies that derive 70% or more revenue from online and virtual retail by tracking the EQM Online Retail Index. The fund is home to 41 stocks that are widely diversified, with each holding no more than 4.6% of assets. The product charges 65 bps in fees per year and trades in paltry volume of about 5,000 shares. It lost 1.2% in the same time frame.

First Trust Nasdaq Retail ETF FTXD

The fund follows the Nasdaq US Smart Retail Index and holds 49 stocks in its basket. It is moderately concentrated across components, with each firm holding less than 8.5% of assets. While apparel retailers and specialty retailers make up for a bigger chunk at 31.7% and 28.2%, respectively, broadline retailers round off the next spot with 22.1% share. FTXD has accumulated $2 million within six months of its debut and has an expense ratio of 0.60%. Volume is paltry as it exchanges less than 3,000 shares a day on average. The ETF remained flat over the past 10 days (read: Follow Warren Buffett With These ETF Strategies).

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