Retail ETFs In Focus Ahead Of Q3 Brick-and-Mortar Earnings

We are at the tail end of the third-quarter earnings season as all sectors save retail have reported. The retail sector has seen about half of its total releases. Total earnings for the companies reported so far are up 37.5% on 10.7% revenue growth with 89.5% beating EPS estimates and 63.2% beating revenue estimates. While earnings and revenues growth is below the preceding quarter’s level, it compares favorably with historical periods.

The retail sector results reported so far were primarily from online vendors and restaurant players. The focus now shifts to traditional brick-and-mortar retailers like Macy’s (NYSE:M) , Nordstrom (NYSE:JWN) , Wal-Mart (NYSE:WMT) , Lowe’s (NYSE:LOW) and Target (NYSE:TGT) that are expected to report this week and the next. Stocks of most of these traditional operators have outperformed the broader market this year on favorable domestic consumer spending backdrop amid declining mall foot traffic and growing digital sales (read: Consumer Confidence at 18-Year High: 5 ETFs to Buy).

However, these stocks lost ground in the two-month period from mid-August to mid-October but shook off the October blues ahead of the broader market. As a result, retail ETFs - SPDR S&P Retail (NYSE:XRT) ETF XRT, VanEck Vectors Retail ETF (V:RTH) and PowerShares Retail Fund (V:PMR) – have gained 2.6%, 2.1% and 4.8%, respectively, in the past month.

Given continued favorable trends in the broader economy, it is reasonable to be optimistic about earnings results from the above-mentioned traditional operators and their stock prices. These have the potential to push the abovementioned ETFs upward or downward.

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) stock 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.

A Peek into the Earnings Lineup

Macy’s has a Zacks Rank #2 and an Earnings ESP of +20.00%, indicating a higher chance of beating estimates this quarter. There have been no earnings estimate revisions for the to-be-reported quarter in the past seven days. Additionally, it delivered average positive earnings surprise of 19.91% in the last four quarters and has a VGM Score of B. The company is expected to report before the opening bell on Nov 14 (see: all the Consumer Discretionary ETFs here).

Nordstrom, which will likely report earnings on Nov 15 after the closing bell, has a Zacks Rank #2 and an Earnings ESP of +4.52%. It has seen positive earnings estimate revision of a penny for the to-be-reported quarter in the past seven days. Analysts raising estimates right before earnings — with the most up-to-date information possible — is a pretty good indicator of some favorable trends for the stock. The company delivered positive earnings surprises in three of the last four quarters with an average beat of 9.75%. It has a VGM Score of A.

Wal-Mart is scheduled to report on Nov 15 before market open. It has a Zacks Rank #3 and an Earnings ESP of -0.70%, indicating lower chances of beating the estimates this quarter. The company delivered average positive earnings surprise of 2.32% in the last four quarters. There have been no earnings estimate revisions over the past seven days for the to-be-reported quarter. Additionally, the company has a VGM Score of A.

Lowe’s is slated to report earnings before the bell on Nov 20. The stock has a Zacks Rank #3 and an Earnings ESP of +1.11%, indicating a reasonable chance of beating estimates this quarter. The company has seen negative earnings estimate revision of a penny over the past seven days for the to-be-reported quarter and delivered a negative earnings surprise of 3.24% on average over the last four quarters. The stock has a VGM Score of A (read: ETFs to Bet on the Upcoming Holiday Season).

Target is also likely to report earnings on Nov 20 before the opening bell. It has a Zacks Rank #2 and an Earnings ESP of +1.41%, indicating a higher chance of beating estimates this quarter. The stock delivered average positive earnings surprise of 0.71% over the past four quarters, and has seen no earnings estimate revision over the past seven days for the to-be-reported quarter. It flaunts a top VGM Score of A.

Conclusion

Given that the sector has a strong Zacks Rank in the top 25% and some earnings surprises are in the cards, retail ETFs are expected to see smooth trading in the days ahead. In particular, all the three abovementioned ETFs have a Zacks ETF Rank #2, suggesting their outperformance (read: ETF & Stock Picks to Defy Subdued September US Retail Sales).

Want key ETF info delivered straight to your inbox?

Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>