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Retail ETFs Slump: What's Up for the Holiday Season?

The retail sector saw a bloodbath on Friday following a slew of weak reports from retailers ranging from department to dollar stores. Additionally, the soft October retail sales data added to the woes. With Thanksgiving less than two weeks away and Christmas coming up in six weeks, the growth prospects for the upcoming holiday season suddenly look dull (read: Top Ranked Retail ETFs Wait for a Holiday Season Rally).

Retail Sales Data

After a flat September, retail sales barely rose 0.1% in October, falling short of the market expectation of 0.3% growth. The lackluster growth can be blamed on a surprise decline of 0.5% in auto sales, implying that cheap gasoline failed to spur consumer spending as expected. Notably, consumer spending accounts for more than two-thirds of demand in the U.S. economy.

Fast Recap of Early Q3 Earnings

Total earnings from 60% of the sector’s total market capitalization reported so far are up 7.8% on revenue growth of 11.1%, with 59.1% surpassing earnings estimates and 45.5% beating on the top line.

The sector kicked-off the earnings season on a solid note with growth rates and beat ratios coming in better than the pre-season expectations and other sector performances. But the trend reversed last week after departmental stores like Nordstrom (JWN) and Macy’s (M) spread an air of pessimism into the broad sector and disappointed investors. Even better-than-expected results from J.C. Penney (JCP) and Kohls (KSS) were unable to sweep away the negative sentiments.

Nordstrom was the major dampener as the stock plummeted 15% on Friday after the company missed on both earnings and revenues by 14 cents and $43 million, respectively. The retailer lowered its sales growth guidance to 7.5–8% from 8.5–9.5% and the adjusted earnings per share guidance to $3.40–$3.50 from $3.70–$3.80 for the full year.

The lackluster results came just a day after shares of Macy’s nosedived 14% on November 11 on the back of weak sales and a downbeat guidance. The second-largest department store retailer posted the third consecutive quarterly decline in sales and missed our estimates by $228 million, though it beat our earnings estimate by a couple of cents. The company now expects sales to decline 2.7–3.1% compared with the previous expectation of a 1% decline and slashed its earnings per share guidance to $4.20–$4.30 from $4.70–$4.80 (see: all the Consumer Discretionary ETFs here).

However, J.C. Penney reported stronger results on November 13 with earnings and revenues coming ahead of our expectations. The company reported loss of 47 cents per share, narrower than the Zacks Consensus Estimate of loss of 58 cents while revenues of $2.897 billion were slightly ahead of our estimate of $2.869. On the other hand, Kohls also topped our estimates by 6 cents on earnings and $26 million on revenues on November 12. Despite the robust earnings announcement, both stocks were victims of the broad retail sector rout on Friday. Shares of JCP tumbled 15.4% while Kohls declined 6.4%, erasing all its gains made on November 12.

Other retailers were also dragged down with their stock prices going deep into red at the close on the day. Some of these include video-game retailer GameStop (GME), watchmaker Fossil Group (FOSL), and apparel retailer Bebe Stores (BEBE) that shed 16.5%, 36.5% and 40%, respectively, on a single day. Big-box retailers like Target (TGT), Best Buy (BBY), Home Depot (HD) and Wal-Mart (WMT) were also hit by the sector slump (read: Wal-Mart Sinks: Focus on WMT-Proof Consumer ETFs).

ETFs in Focus

Given this, the retail ETF world also saw rough trading on the day with all the three funds, namely SPDR S&P Retail ETF (XRT), Market Vectors Retail ETF (RTH) and PowerShares Retail Fund (PMR) losing 3.8%, 2.9% and 3%, respectively.


This product tracks the S&P Retail Select Industry Index, holding 104 securities in its basket. It is widely spread across each component as none of these holds more than 1.31% of total assets. Small cap stocks dominate about two-thirds of the portfolio while the rest have been split between the other two market cap levels. In terms of sector holdings, apparel retail takes the top spot with nearly one-fourth share while specialty stores, automotive retail and Internet retail also have a double-digit allocation each. XRT is the most popular and actively traded ETF in the retail space with AUM of about $688 million and average daily volume of more than 3.9 million shares. It charges 35 bps in annual fees and is down 11% in the year-to-date timeframe.


This fund tracks the Market Vectors US Listed Retail 25 Index and holds about 26 stocks in its basket. It is a large cap centric fund and is heavily concentrated on the top firm Amazon.com (AMZN) with 14.6% share, closely followed by Home Depot. Sector wise, specialty retail occupies the top position with 29% share, followed by a double-digit allocation each to Internet & catalogue retail, hypermarkets, drug stores, departmental stores, and health care services. The fund has amassed $191.5 million in its asset base while average daily volume is moderate at nearly 72,000 shares. Expense ratio came in at 0.35%. The product has added 3% so far this year (read: Amazon All Set for the Holiday Season: 4 ETFs to Buy).


This retail fund provides diversified exposure across various market caps with 42% each in small and large caps and the rest in mid caps. This is easily done by tracking the Dynamic Retail Intellidex Index. The fund has accumulated just $22.4 million in its asset base while trades in a light volume of about 6,000 shares a day. The ETF charges 63 bps in fees per year. In total, the product holds 30 securities with none accounting for more than 5.72% of assets. In terms of industrial exposure, specialty retail takes the top spot at 43%, while food retail (22%) and drug stores (12%) round off the top three positions. PMR has shed 6.3% in the year-to-date timeframe.

What Awaits the Holiday Season?

Despite the current slide, the outlook for the sector looks quite promising. This is because consumer confidence is on a rise, offering some hope for retailers ahead of the crucial holiday season. The University of Michigan consumer sentiment index rose to 93.1 in early November from 90 in October, indicating that economic recovery is on track despite the twin attacks of a strong dollar and weak global demand that have been hurting the industrial sector, especially manufacturing.

Additionally, the National Retail Federation (NRF) expects sales in November and December (excluding autos, gas and restaurant) to grow at a solid pace of 3.7%. Though this marks a deceleration from last year’s growth rate of 4.1%, it is well above the 10-year average of 2.5%. A recent survey by Gallup showed that Americans intend to spend an average $812 on gifts this holiday season, up from $781 last year and the highest expected spending since 2007.

The retail sector bodes solid Industry rank from Zacks perspective, which divides the sector into 19 industries at the expanded level. Out of these, 64% of the industries have a solid Zacks Industry Rank in the top 42%, reflecting strong growth prospects in the weeks ahead (read: 4 Solid Reasons to Buy Consumer Discretionary ETFs).

Moreover, the three products detailed above have a Medium risk outlook with a top Zacks ETF Rank of 1 or ‘Strong Buy’ rating for XRT and RTH, and Zacks ETF Rank of 3 or ‘Hold’ rating for PMR. As a result, risk tolerant investors may want to consider the recent slump a buying opportunity, should they have the patience for extreme volatility.

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SPDR-SP RET ETF (XRT): ETF Research Reports
MKT VEC-RETAIL (RTH): ETF Research Reports
PWRSH-DYN RETL (PMR): ETF Research Reports
NORDSTROM INC (JWN): Free Stock Analysis Report
MACYS INC (M): Free Stock Analysis Report
PENNEY (JC) INC (JCP): Free Stock Analysis Report
KOHLS CORP (KSS): Free Stock Analysis Report
WAL-MART STORES (WMT): Free Stock Analysis Report
GAMESTOP CORP (GME): Free Stock Analysis Report
FOSSIL GRP INC (FOSL): Free Stock Analysis Report
TARGET CORP (TGT): Free Stock Analysis Report
BEST BUY (BBY): Free Stock Analysis Report
HOME DEPOT (HD): Free Stock Analysis Report
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