Retailers Slide: Will ETFs Bear The Pain As Q1 Unfolds?

The Q1 earnings season has reached the tail end for all sectors save retail, which has seen about half of its total releases. Total earnings for the sector reported so far are up 2.8% on 5.4% revenue growth with 60% beating EPS estimates and an equal proportion beating revenue estimates.

However, disappointing results from departmental stores like Macy’s (NYSE:M) and Kohl’s (NYSE:K) triggered a sell-off in the sector yesterday. Macy’s plunged 17% to its lowest since 2011 while Kohl’s tumbled nearly 8% after posting a bigger-than-expected drop in quarterly sales. Notably, Macy’s missed our estimates on both earnings and revenues while Kohl’s lagged the revenue mark. Dillard's (NYSE:DDS) tanked 17.5% despite a profit beat. This spread ripples of pessimism over consumer spending on apparel and accessories, pushing other retail stocks down as well (read: Is a Wave of Store Closures Troubling Retail ETFs?).

Some noteworthy stocks that saw terrible trading in yesterday’s session are Sears Holdings (NASDAQ:SHLD) which fell 9.6%, Nordstrom (NYSE:JWN) which declined 7.6% and J.C. Penney (NYSE:JCP) that slid 7.4%. Also, Target (NYSE:TGT) , American Eagle Outfitters (NYSE:AEO) , Gap (NYSE:GPS) , Urban Outfitters (NASDAQ:URBN) and Rite Aid (NYSE:RAD) lost 4%, 4.9%, 3.6%, 2.9% and 2.4%, respectively.

Nordstrom (NYSE:JWN) dropped 5% further in after-market hours yesterday following its quarterly results that topped our earnings estimate but reported weaker-than-expected same-store sales.

The rough trading has spread into the ETF world with SPDR S&P Retail ETF (MX:XRT) stealing the show with a 2.7% decline on the day. VanEck Vectors Retail ETF (V:RTH) lost 0.7% while PowerShares Retail Fund (LON:PMR) was flat.


Given that earnings are the most important drivers of stock performance, it is necessary to look at the expected surprise of retailers that are likely to report next week. These also have the potential to push the related ETFs upward or downward (read: 2 ETFs & Stocks to Cheer Up Despite Gloomy March Retail Sales).

According to the our surprise prediction methodology, a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) when combined with a positive Earnings ESP increases the odds of an earnings beat, while a Zacks Rank #4 or 5 (Sell rated) are best avoided.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

A Peek into Earnings Surprises

Home Depot (NYSE:HD) and Staples (NASDAQ:SPLS) are slated to report earnings before the bell on May 16. Home Depot has a Zacks Rank #2 and Earnings ESP of +0.62%, indicating a higher chance of beating the estimates this quarter. The company saw no earnings estimate revision over the past three months for the to-be-reported quarter and delivered a positive earnings surprise in each of the last four quarters, with an average beat of 4.38%. The stock has a VGM Style Score of C.

On the other hand, Staples (NASDAQ:SPLS) has a Zacks Rank #4 (Sell) and an Earnings ESP of 0.00%. However, it delivered an average positive earnings surprise of 1.56% for the past four quarters and has seen its earnings estimates rising by a penny for the to-be-reported quarter over the past three months. The stock has a top VGM Style Score of A.

Target (NYSE:TGT) has a Zacks Rank #4 and an Earnings ESP of 0.00%. The stock has seen negative earnings estimate revision of 42 cents for the to-be-reported quarter over the past three months. However, it delivered a positive earnings surprise in the last four quarters, with an average beat of 9.34% and has a top VGM Style Score of A. The company is expected to report before the opening bell on May 17 (see: all the Consumer Discretionary ETFs here).

Wal-Mart (NYSE:WMT) is scheduled to report on May 18 before market open. It has a Zacks Rank #3 and an Earnings ESP of +1.04%, indicating a reasonable chance of beating the estimates this quarter. Though the company delivered an average positive earnings surprise of 4.78% in the last four quarters and has a top VGM Style Score of A, it has seen negative earnings estimate revision by a penny over the past three months for the to-be-reported quarter.

Foot Locker (NYSE:FL) , which will likely reports earnings on May 19 before the opening bell, has a Zacks Rank #3 and an Earnings ESP of 0.00%. Though the stock has seen negative earnings estimate revision of 15 cents over the past 90 days for the yet-to-be-reported quarter, it delivered positive earnings surprises in three of the last four quarters, with an average beat of 2.24%. Additionally, the stock has a VGM Style Score of A.

Conclusion

The sector has an ugly Zacks Rank in the bottom 6% with few earnings surprises in cards and most retailers witnessing negative earnings estimate revisions. So the space may see rough trading in the days ahead.

However, retail ETFs could stand out well as the funds can easily counter shocks from some of the industry’s biggest components given their spread-out exposure to a number of firms in various types of industries like specialty retail, hypermarkets, drug stores, food retail, Internet retail and many others. Further, the ETFs mentioned above have favorable ranks. Notably, RTH has a Zacks ETF Rank of 2 while XRT and PMR have a Zacks ETF Rank of 3.

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Home Depot, Inc. (The) (HD): Free Stock Analysis Report

VANECK-RETAIL (RTH): ETF Research Reports

PWRSH-DYN RETL (PMR): ETF Research Reports

American Eagle Outfitters, Inc. (AEO): Free Stock Analysis Report

Gap, Inc. (The) (GPS): Free Stock Analysis Report

Foot Locker, Inc. (FL): Free Stock Analysis Report

Nordstrom, Inc. (JWN): Free Stock Analysis Report

Urban Outfitters, Inc. (URBN): Free Stock Analysis Report

Wal-Mart Stores, Inc. (WMT): Free Stock Analysis Report

Target Corporation (TGT): Free Stock Analysis Report

Rite Aid Corporation (RAD): Free Stock Analysis Report

Staples, Inc. (SPLS): Free Stock Analysis Report

Macy's Inc (M): Free Stock Analysis Report

Dillard's, Inc. (DDS): Free Stock Analysis Report

J.C. Penney Company, Inc. Holding Company (JCP): Free Stock Analysis Report

Kellogg Company (K): Free Stock Analysis Report

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