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Retail ETFs to Shine as More Q3 Earnings Unfold

The Q3 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 2.3% from the same period last year on 10.1% revenue growth with 81.8% beating EPS estimates and 63.6% beating revenue estimates.

While earnings growth is well below the last reporting cycle and the four-quarter average, revenue growth has been accelerating compared with the other recent periods. Additionally, the quarter so far has witnessed an above-average proportion of positive surprises, implying that the momentum has been carried forward. Further, the estimates revision trend for the fourth quarter has been favorable, with earnings estimates holding up a lot better relative to other comparable periods (read: Amazon ETFs to Buy on Q3 Blowout Results).

This is especially true given the impressive stock market performance of department store operators like Macy’s M, Nordstrom JWN, Kohl’s KSS, J.C. Penney JCP and others following their quarterly releases. Nordstrom and J.C. Penney posted better-than-expected results. Meanwhile, Kohl's beat on revenues but missed on earnings, while Macy's beat on earnings and missed on revenues.

The strength in these stocks led to smooth trading in the broad retail sector. In fact, retail ETFs — SPDR S&P Retail ETF XRT, VanEck Vectors Retail ETF RTH and PowerShares Retail Fund PMR — added 0.7%, 1.5% and 0.6%, 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 related ETFs upward or downward (see: all the Consumer Discretionary ETFs here).

A Peek into Earnings Surprises

Reports from Home Depot HD, Target TGT, Wal-Mart WMT, and Foot Locker 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 increases 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 Nov 14. The stock has a Zacks Rank #2 and an Earnings ESP of +0.57%, indicating higher chances of beating estimates. The company saw positive earnings estimate revision of a penny 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 3.77%. The stock has a VGM Style Score of A.

Target has a Zacks Rank #2 and an Earnings ESP of -1.60%, indicating less chances of beating estimates. The stock has seen solid earnings estimate revision of seven cents for the to-be-reported quarter over the past three months and delivered a positive earnings surprise of 15.11% 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 Nov 15 (read: Profit from Retailers' Defaults With These ETFs).

Wal-Mart is scheduled to report on Nov 16 before market open. It has a Zacks Rank #3 and an Earnings ESP of +0.96%, indicating a reasonable chance of beat. The company delivered an average positive earnings surprise of 1.99% in the last four quarters but witnessed negative earnings estimate revision of a penny over the past three months for the to-be-reported quarter. It has a VGM Style Score of B.

Foot Locker, which will likely report earnings on Nov 17 before the opening bell, has a Zacks Rank #3 and an Earnings ESP of -0.48%, indicating lower chances of beating estimates. The stock has seen negative earnings estimate revision of 41 cents over the past 90 days for the yet-to-be-reported quarter and delivered an average negative earnings surprise of 6.55% in the last four quarters. Additionally, the stock has a VGM Style Score of B.  

Conclusion

With notable earnings surprises in the cards and a favorable stock rank for big-box retailers, the ETF space will continue to see good trading in the days ahead even though the sector has an ugly Zacks Rank in the bottom 0%. Further, the ETFs mentioned above have favorable ranks. Notably, RTH and ZRT have a Zacks ETF Rank of 2 while PMR has 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
 
SPDR-SP RET ETF (XRT): ETF Research Reports
 
PWRSH-DYN RETL (PMR): ETF Research Reports
 
Foot Locker, Inc. (FL): Free Stock Analysis Report
 
Nordstrom, Inc. (JWN): Free Stock Analysis Report
 
Wal-Mart Stores, Inc. (WMT): Free Stock Analysis Report
 
Target Corporation (TGT): Free Stock Analysis Report
 
Macy's Inc (M): Free Stock Analysis Report
 
J.C. Penney Company, Inc. Holding Company (JCP): Free Stock Analysis Report
 
Kohl's Corporation (KSS): Free Stock Analysis Report
 
Waste Management, Inc. (WM): Free Stock Analysis Report
 
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