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Can Wal-Mart Earnings Beat Lift These Consumer ETFs?

Sweta Killa

Wal-Mart (WMT), the world's largest retailer, cheered investors’ with its third-quarter fiscal 2016 results before the market opened yesterday, wherein it beat our earnings estimates and provided an upbeat guidance for the holiday quarter. However, the company missed our revenue estimates and narrowed the full-year earnings guidance range.

Q3 Earnings in Detail

Earnings per share came in at $1.03, beating the Zacks Consensus Estimate by 6 cents but deteriorating from the year-ago earnings of $1.15. Revenues slid 1.3% year over year to $117.4 billion, which slightly fell short of the Zacks Consensus Estimate of $117.9 billion. Currency headwind is the biggest culprit for the lower-than-expected revenues (read: Q4 Outlook for Consumer Staples ETFs).

The company expects sales to grow around 1% in the ongoing holiday quarter and earnings per share in the range of $1.40–$1.55; the midpoint is much higher than the Zacks Consensus Estimate of 97 cents. For the full year, Wal-Mart tapered its earnings per share guidance range to $4.50–$4.65 from $4.40–$4.70. The low end of the guidance is above our estimate of $4.46.

The mega retailer continues to invest in global e-commerce initiatives, wage structure and workers’ training. These strategic operational improvements are expected to dilute earnings by 24 cents in fiscal 2016. Additionally, the headwinds in the U.S. pharmacy business will hurt earnings by 11 cents per share in the full year. Also, incremental investment in global e-commerce and currency translation will impact full-year earnings per share by 6–9 cents and 16 cents, respectively.

Market Impact

Following the huge earnings beat, shares of WMT rose as much as 5.2% on the day on elevated volumes of more than two times the normal day. This smooth trading might continue at least in the near term, encouraging investors to make a play on the stock through a basket form. For them, we have highlighted four consumer ETFs having the largest allocation to this retail giant and likely to be in focus in the days ahead:

Market Vectors Retail ETF (RTH)

This fund tracks the Market Vectors US Listed Retail 25 Index and holds about 26 stocks in its basket with AUM of $186 million. Average daily volume is moderate at around 73,000 shares while expense ratio came in at 0.35%.

In terms of holdings, WMT is the third firm making up for 6.3% of assets while sector wise, specialty retail takes the largest share with 29% of assets, followed by double-digit allocation to Internet and catalogue retail, hypermarkets, drug stores, and health care services. The fund gained 1.2% following Walmart earnings and has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a Medium risk outlook (read: Retail ETFs Slump: What's Up for the Holiday Season?).

Consumer Staples Select Sector SPDR Fund (XLP)

This is the most popular consumer staples ETF that follows the Consumer Staples Select Sector Index and has amassed about $7.5 billion in its asset base. The fund charges 14 bps in fees per year from investors and trades in heavy volume of nearly 9.5 million shares a day. In total, the fund holds about 39 securities in its basket with Wal-Mart taking the sixth spot at 5.20%.

From a sector look, food and staples retailing takes the top spot at 24%, with beverages, household products, food products, and tobacco accounting for double-digit allocation each. XLP has lost 0.04% on the day and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook.

Fidelity MSCI Consumer Staples Index ETF (FSTA)

This fund tracks the MSCI USA IMI Consumer Staples Index, holding 100 stocks in its basket. Out of these, WMT takes the seventh spot with 5% share. In terms of industrial exposure, about one-fourth of the portfolio is allotted to food and staples retailing while beverages and food products round off the top three.  

The product has amassed $228.6 million in its asset base while trades in good volume of around 144,000 shares a day on average. It is one of the low cost choices in the space, charging 12 bps in annual fees from investors. The fund was down 0.07% and has a Zacks ETF Rank of 3 with a Medium risk outlook (see: all Consumer Staples ETFs here).
Vanguard Consumer Staples ETF (VDC)

This fund manages a $2.5 billion asset base and has exposure to a basket of 100 consumer stocks by tracking the MSCI US Investable Market Consumer Staples 25/50 Index. The product charges a low fee of 12 bps per year while trades in good volume of around 107,000 shares.

Here, WMT occupies the seventh position in the basket with 4% allocation. The product is widely spread across packaged foods & meat, soft drinks, household products, and tobacco that make up for double-digit allocation each. The fund shed 0.15% on the day and has a Zacks ETF Rank of 3 with a Medium risk outlook.

Outlook Still Bleak

While Wal-Mart came up with solid earnings, revenues are still lagging and the long-term outlook remains bleak. This is especially true as the company is increasing its spending in the e-commerce and digital space over the next two years that will continue to weigh on earnings per share growth. As a result, earnings per share are expected to decline 6–12% in FY17 and look unlikely to resume growth in the range of 5–10% before fiscal 2019 (read: Wal-Mart Sinks: Focus on WMT-Proof Consumer ETFs).

As per the Zacks, Wal-Mart is projected to grow 3.20% annually over the next five years, which is more than half the industry average growth of 8.90%. Additionally, the earnings estimate revisions for the current fiscal year and the next have been trending downward over the past three months. All these suggest more pain for this retail giant in the coming months.

If these weren’t enough, the stock currently has a Zacks Rank #5 (Strong Sell) and a poor Zacks Industry Rank (in the bottom 25%). However, it has solid Growth and Value style scores of ‘A’ each, reflecting some optimism for the near term.

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WAL-MART STORES (WMT): Free Stock Analysis Report
MKT VEC-RETAIL (RTH): ETF Research Reports
SPDR-CONS STPL (XLP): ETF Research Reports
FID-STAPLES (FSTA): ETF Research Reports
VIPERS-CONS STA (VDC): ETF Research Reports
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