All posts from Zacks
Zacks in Our Research. Your Success.,

Retailers Sink: Alarm Bell Ringing for ETFs as Q1 Unfolds?

The Q1 earnings season has reached the tail end for all sectors save retail, which is yet to come up with about half of its total reports. Total earnings for the sector reported so far are up 5.2% on 10.2% revenue growth. Notably, revenue growth of this sector has been the best so far this season.

However, disappointing results from the departmental store Macy’s (M) and a watchmaker Fossil Group (FOSL) triggered the sell-off in the stocks yesterday. Macy’s plunged 15.2% to its lowest since December 2011 on the day after posting a bigger-than-expected drop in quarterly sales and trimming its full-year outlook. This sent ripples of pessimism over consumer spending on apparel and accessories (read: Should You Buy Retail ETFs Despite Soft Sales?).
Meanwhile, Fossil Group tumbled as much as 34% to the 2009 low following disappointing results and reduced forecast. Given the sluggish earnings reports, Michael Kors Holdings (KORS), a Macy’s supplier and licensing partner with Fossil, tanked 12%, representing the worst one-day decline in 11 months.
Adding to the woes was the slump in the share price of Staples (SPLS) and Office Depot (ODP) after a U.S. federal judge rejected their $6.3 billion merger deal on antitrust concerns announced in February 2015. SPLS and ODP plummeted 18.3% and 40.4%, respectively. Further, the discount retailer Ross Stores (ROST) tanked 5.4% on the day after Piper Jaffray downgraded the stock, citing weakness in the consumer environment. The slew of negative news flow washed away all the optimism from the sector, pushing other retail stocks down as well.

Some noteworthy stocks that saw terrible trading in yesterday’s session are Nordstrom (JWN) which fell 7%, Kohl’s Corp (KSS) down 6%, Tiffany & Co (TIF) down 6%, Coach Inc. (COH) with a 6% decline, Ralph Lauren Corporation (RL) down 5.4%, and Target (TGT) down 5.4%. Home Depot (HD), Wal-Mart (WMT) and J.C. Penney (JCP) lost over 2% on the day.
The rough trading has spread into the ETF world with SPDR S&P Retail ETF (XRT) stealing the show with a 4.4% decline on the day. This represents the worst drop in nearly 5 years. Other funds – Market Vectors Retail ETF (RTH) and PowerShares Retail Fund (PMR) – lost nearly 2% each. Though these funds have the potential to outperform given their solid Zacks ETF Rank of 1 (Strong Buy) or 2 (Buy), the sliding stock prices based on earnings and feeble fundamentals will likely push them lower. This is because earnings are the most important drivers of stock performance (see: all the Consumer Discretionary ETFs here).

With a flurry of retailers’ earnings this week and in the next, the movement of the ETFs will depend on their hidden surprises. As a result, we have taken a closer look at the expected earnings surprises of the retailers that have the potential to push the space and ETFs upward or downward in the coming days.   

A Peek into Earnings Surprises

Reports from the departmental store giants – Nordstrom and JC Penney – slated after the bell on May 12 and before the bell on May 13, respectively, will be crucial for the sector. Both stocks have a Zacks Rank #4 (Sell) with an Earnings ESP of -2.22% for JWN and -5.00% for JCP. This reflects that they are unlikely to beat estimates this quarter, another markdown for the sector.

For the next week, Home Depot, Staples, Target, Lowe’s (LOW), Wal-Mart and Foot Locker (FL) will be especially on investors’ radar. Home Depot and LOW, which are expected to report before the market opens on May 17 and May 18, respectively, have a Zacks Rank #3 (Hold) and a positive Earnings ESP of +1.50% and +2.41%, indicating a reasonable chance of beating estimates this quarter. Staples and Target will also release their earnings report on May 18 before the opening bell. Both have a Zacks Rank #4 and an Earnings ESP of 0.00%, pointing to lower chances of beating estimates.
Wal-Mart has a Zacks Rank #3 and an Earnings ESP of 0.00%, making surprise prediction difficult while Foot Locker has a Zacks Rank #4 and an Earnings ESP of 0.00%, hinting at lower chances of beating estimates. Wal-Mart and Foot Locker will announce their earnings on May 19 and May 20, respectively, before the market opens (read: Q2 Outlook For Retail ETFs).

Given the mixed earnings surprise prediction, it seems that the space will continue to see rough trading in the days ahead, though a big surprise from any industry player could be in store. Further, most of the retailers have witnessed negative earnings estimate revisions over the past three months.  

Weak Industry Trends

Despite solid job growth and cheap fuel, consumers are cautious about their spending habits and are keen on savings that are letting the retail sector down. This is especially true, as consumer spending, which accounts for more than two-thirds of U.S. economic activity, has slowed for three consecutive quarters. In particular, consumer spending increased just 1.9% in the first quarter, down from 2.4% growth recorded in the fourth quarter of 2015 and 3.2% growth in the third quarter.

The recent consumer sentiment survey for April also exhibits a downbeat tone. The latest University of Michigan index came in at the lowest level of 89 in seven months, down from 91 in March while the Consumer Confidence Index slumped to 94.2 from 96.1 in March. Moreover, the retail sector falls under the market weight category, as per the May Zacks Report. While apparels and food/drug retail have a Zacks Industry Rank of 2.88 and 2.92, respectively, non-food retail falls in an unattractive industry with a Rank of 3.01. 
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
SPDR-SP RET ETF (XRT): ETF Research Reports
VANECK-RETAIL (RTH): ETF Research Reports
PWRSH-DYN RETL (PMR): ETF Research Reports
MACYS INC (M): Free Stock Analysis Report
FOSSIL GRP INC (FOSL): Free Stock Analysis Report
STAPLES INC (SPLS): Free Stock Analysis Report
OFFICE DEPOT (ODP): Free Stock Analysis Report
MICHAEL KORS (KORS): Free Stock Analysis Report
ROSS STORES (ROST): Free Stock Analysis Report
TARGET CORP (TGT): Free Stock Analysis Report
PENNEY (JC) INC (JCP): Free Stock Analysis Report
NORDSTROM INC (JWN): Free Stock Analysis Report
To read this article on click here.
Zacks Investment Research
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report