Will Big-Box Retailers Push Up Retail ETFs In Q2 Earnings?

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 down 1.7% from the same period last year on 6.7% revenue growth with 73.9% beating EPS estimates and 78.3% beating revenue estimates.

While the growth pace is well below the four-quarter average, revenue and earnings surprises are much better than recent quarters. This is especially true as woes for departmental stores continued given the shift toward digital shopping.

Though departmental stores - Macy’s (NYSE:M) and Kohl’s (NYSE:KSS) - topped our revenue and earnings estimate, they reported a drop in same-store sales, sparking off concerns on the prospect of their turnaround before the crucial holiday season. As a result, Macy’s dropped 10.2% following the earnings announcement on August 10, marking their biggest daily loss since January 5 while Kohl's shares had its worst day since January 8 falling 5.8%. Another department store chain Dillard's (NYSE:DDS) also tanked 15.9% on August 10 after it missed on both fronts (read: 3 ETFs & Stocks to Buy Post June Retail Sales).

J. C. Penney (NYSE:JCP) shed as much as nearly 17% at the close on August 11 to reach an all-time low of $3.77 following dismal second-quarter results.

All these results continued to weigh on the broad retail sector, suggesting more pain ahead for the retailers. In fact, retail ETFs - SPDR S&P Retail (MX:XRT) ETF XRT, VanEck Vectors Retail ETF (V:RTH) and PowerShares Retail Fund (V:PMR) – shed 3.5%, 1.1% and 2.1%, respectively, over the past five trading days.

Given that earnings are the most important drivers of stock performance, it is necessary to look at the expected surprise of big-box retailers that are likely to report this week. These also have the potential to push the related ETFs upward or downward (see: all the Consumer Discretionary ETFs here).

A Peek into Earnings Surprises

Reports from Home Depot (NYSE:HD) , Staples (NASDAQ:SPLS) , Target (NYSE:TGT) , Wal-Mart (NYSE:WMT) , and Foot Locker (NYSE:FL) will be crucial for the sector this week.

According to our surprise prediction methodology, a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) when combined with a positive Earnings ESP has chances of an earnings beat. A Zacks Rank #4 or 5 (Sell rated) is best avoided going into the earnings announcement, especially when the company is seeing negative estimate revisions. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Home Depot is slated to report earnings before the bell on August 15. The stock has a Zacks Rank #2 and Earnings ESP of +0.45%, indicating higher chances of beating estimates this quarter. The company saw negative earnings estimate revision of a penny over the past three months for the to-be-reported quarter but delivered a positive earnings surprise in each of the last four quarters, with an average beat of 3.45%. The stock has a VGM Style Score of B.

Staples has a Zacks Rank #3 and an Earnings ESP of 0.00%, making surprise prediction difficult. It saw no earnings estimate revision for the to-be-reported quarter over the past three months and did not deliver any earnings surprise over the past four quarters. The stock has a top VGM Style Score of A. The company is expected to report on August 16.

Target has a Zacks Rank #2 and an Earnings ESP of 0.00%. The stock has seen solid earnings estimate revision of 21 cents for the to-be-reported quarter over the past three months and delivered a positive earnings surprise of 16.46% in the last four quarters. It has a top VGM Style Score of A. The company is expected to report before the opening bell on August 16 (read: Target Relieves Some Pain of Retail ETFs).

Wal-Mart is scheduled to report on August 17 before market open. It has a Zacks Rank #2 and an Earnings ESP of +0.94%, indicating a higher chance of beating estimates this quarter. The company delivered an average positive earnings surprise of 2.98% in the last four quarters and witnessed positive earnings estimate revision of a penny over the past three months for the to-be-reported quarter. It has a top VGM Style Score of A.

Foot Locker, which will likely report earnings on August 18 before the opening bell, has a Zacks Rank #3 and an Earnings ESP of -3.30%, indicating lower chances of beating estimates. Though the stock has seen negative earnings estimate revision of 13 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 2.06%. Additionally, the stock has a VGM Style Score of B.

Conclusion

With a few earnings surprises in the cards and a favorable stock ranks for big-box retailers, the ETF space might see some good trading in the days ahead even though the sector has an ugly Zacks Rank in the bottom 13%.

This is because retail ETFs could stand out well as these 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 1 while XRT has a Zacks ETF Rank of 2. Meanwhile, PMR has a Zacks ETF Rank of 3.

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