The latest quarterly earnings season has demonstrated a very weak performance by the retail sector, which was consistent with the economic data.
On August 13, the report on Retail Sales for July from the Commerce Department’s Census Bureau was a bit disappointing. Although economists were expecting an increase of 0.3 percent, the report indicated a 0.2 percent increase.
Significant Slowdown
When compared with June’s 0.6 percent surge, July’s result demonstrated a significant slowdown. Nevertheless, after excluding sales of automobiles, gasoline and building materials, so-called “core” retail sales increased by 0.4 percent, as expected by economists. Meanwhile, investors in Home Depot (HD) could probably be heard yelling, “We’ve got a core for ya’ – right here!” (HD will report its second quarter earnings on August 20.)
The weak retail sales data came as no surprise to those of us who read the August 5 report from the Gallup Organization, based on the results of its poll which revealed that self-reported consumer spending has been flat since May. The report disclosed that during the month of July, self-reported daily consumer spending was $89 – compared with $90 during May and June. Gallup concluded that the flat spending levels were consistent with the weak GDP reports and the lack of improvement Gallup found in its Payroll to Population employment rate.
It is not necessary to single-out high-end boutiques to find weak second-quarter earnings. Weak employment prospects, part time jobs, sequester and increased payroll taxes have all contributed damage to low end shoppers who have reigned in their spending in recent weeks.
Middle class bellwether Wal-Mart (WMT) reported second-quarter earnings of $4.07 billion, or $1.25 a share, compared with $4.02 billion, or $1.18 a share, during the second quarter of 2012. The company’s revenue fell short, reaching $116.2 billion, compared with expectations of $118.09 billion.
Target (TGT) is scheduled to report earnings on August 21. During the first quarter we saw a disappointing performance, as earnings reached only 77 cents per share, compared with estimates of 87 cents. Revenue was $16.6 billion, falling short of the estimated $16.82 billion.
Macy’s (M) reported earnings of 72 cents per share, missing estimates of 79 cents per share. Its revenue was $6.07 billion as opposed to the estimated $6.28 billion.
JC Penney (JCP) is another story altogether. Its second quarter earnings will be reported by way of a conference call on August 20 at 8:30. The company remains under serious cash flow pressure as its executive suite has become a revolving door of departures and its efforts to become an upscale, trendy retailer have apparently failed. Sales have dropped sharply (25% in 2012) and the company’s stock is down some 30% since last May. On May 16, JCP reported a first-quarter loss of $1.31 per share, which came nowhere near the estimated loss of 86 cents per share. At $2.64 billion, its first-quarter revenue fell far short of the estimated $2.72 billion.
Grim Back To School
As for the annual back-to-school shopping season, Deloitte reported on July 29 that its survey revealed that although consumers feel more upbeat about the economy than they did last year, their back-to-school spending plans revealed some grim aspects of the pain many families must experience:
Consumers spending more may be doing so out of necessity rather than a desire to splurge this year. Among consumers who expect their spending to increase (34 percent), the primary reasons are: prices are generally higher (57 percent), children need more expensive items (42 percent), and school budget cuts mean parents have to pay for more items (25 percent). More than two-thirds (68 percent) of parents of children in grades K-12 even said they would forego purchases for themselves to pay for back-to-school.
With all of the volatility in the retail sector, retail ETFs can offer potential trading opportunities:
SPDR S&P Retail ETF (XRT) – This ETF is designed to obtain results which correspond to the performance of the S&P Retail Select Industry Index. XRT employs a replication strategy. It generally invests substantially all, but at least 80%, of its total assets in the securities comprising the S&P Retail Select Industry Index, which represents the retail industry group of the S&P Total Market Index.
- SPDR Consumer Discretionary ETF (XLY) – This ETF is designed to obtain results which correspond to the performance of the S&P Retail Select Industry Index. XRT employs a replication strategy. It generally invests substantially all, but at least 80%, of its total assets in the securities comprising the the S&P Retail Select Industry Index, which represents the retail industry group of the S&P Total Market Index.
- SPDR Consumer Staples ETF (XLP) – This ETF is designed to obtain results which correspond to the performance of the Consumer Staples Select Sector Index. The fund employs a replication strategy. It generally invests substantially all, but at least 95%, of its total assets in the securities comprising the Consumer Staples Select Sector Index, which includes companies from the following industries: food and staples retailing; household products; food products; beverages; tobacco; and personal products.
- Direxion Daily Retail Bull 3x Shares ETF (RETL) – This ETF is designed to obtain results which correspond to 300% of the daily performance of the Russell 1000 Retail Index and/or financial instruments which provide leveraged and unleveraged exposure to the index, which is comprised of constituent companies of the Russell 1000, which measures the performance of the large-cap segment of the U.S. equity universe, involved in the sale of discretionary products supplied by manufacturers for consumers.
- ProShares UltraShort Consumer Services ETF (SCC) – This ETF is designed to obtain results which correspond to twice the inverse (-2x) of the daily performance of the Dow Jones U.S. Consumer Services Index by investing in derivatives which ProShares Advisors believes, in combination, should have similar daily return characteristics as twice the inverse (-2x) of the daily performance of the Dow Jones U.S. Consumer Services Index.
- ProShares UltraShort Consumer Goods ETF (SZK) – This ETF is designed to obtain results which correspond to twice the inverse (-2x) of the daily performance of the Dow Jones U.S. Consumer Goods Index by investing in derivatives which ProShares Advisors believes, in combination, should have similar daily return characteristics as twice the inverse (-2x) of the daily performance of the Dow Jones U.S. Consumer Goods Index.
A weak retail sector means weak economy, however, investors and traders with solid strategies and tactics can take advantage of today’s situation through the power and flexibility of retail based exchange traded funds.