The Market Vectors®Retail ETF (RTH) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Market Vectors US Listed Retail 25 Index (MVRTHTR). The Index is a rules-based index intended to track the overall performance of 25 of the largest U.S. listed, publicly traded retail companies.
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Economists forecast retail sales rose 0.4% in August which will mark a slight acceleration from July's pace, although they note auto sales likely accounted for a good portion of the month's momentum.
The early read on September for U.S. retailers is that a continuation of weak mall traffic and a heightened promotional stance is occurring.
By sector, retailers with a mix of healthcare products (WAG, COST) or sitting in the sweet spot where consumer "trade down" (TJX, ROST, SIG) to their products are holding up better than many apparel sellers (AEO, ARO, LTD, GPS, M, KSS).
The latest round of sales reports from U.S. retailers mostly came in ahead of analyst estimate, but an increase in promotional activity from the sector could be felt down the line when quarterly bottom lines are reported.
The general trend of apparel sellers suffering as consumers spend on big-ticket items such as automobiles and home improvements seems to be growing stronger.
Retail traffic to U.S. stores has declined in 8 out of the last 10 weeks, according to data compiled from ShopperTrak.
Though a few on-trend firms such as Michael Kors (KORS +0.1%) and Express (EXPR +8.5%) are still firing on all cylinders, and a heat wave in the Midwest has had an effect, the overall trend for the back-to-school season and holiday season looks weak.
Analysts also think consumers are likely to pick up their reliance on deals as discretionary spending on housing and automobiles "crowds out" normal outlays.
Retail is in a state of "bifurcation" as on-trend luxury retailers (KORS, JWN, TIF) and home improvement specialists (HD, LOW) thrive, while heavyweight merchandise retailers (WMT, TGT, COST), mall-based apparel chains (AEO, ARO, LTD), and discounters (DG, DLTR, FDO) disappoint.
As execs with Target noted during the firm's earnings call this morning, consumers seem more than happy to buy new automobiles and fix up their houses - but have tightened up on toothbrushes, socks, and soap.
A few companies - through some good luck and solid execution - sit in a consumer demand sweet spot. Ross Stores (RST), TJX Companies (TJX), and Subaru (FUJHY.PK) come to mind.
Earnings reports this week from Wal-Mart (WMT +0.6%), Nordstrom (JWN +1.9%), and Macy's (M -0.9%) have heightened importance due to the storm clouds which seem to be gathering over consumer spending for the second half of the year.
What to watch: Wal-Mart's forecast for Q2 same-store sales is fairly wide at 0% to 2%, a dip into negative territory could turn sentiment south in a hurry. The word "promotional" could spook investors of Macy's and Nordstrom, while commentary from all three retailers on early back-to-school sales trends will be critical for sentiment sector-wide.
The S&P 500 (SPY) is fairly valued, says Goldman, but opportunity lies in cyclicals (XLY, XLE, XLI, XLB) which are more undervalued vs. defensives (XLU, XLP, XLV, XTL) than at any time in the last 15 years. "Given the 4 P/E multiple point head start, even a slight valuation normalization should translate into outperformance of cyclicals over defensives during the next 12 months."
Consumer spending watch: Gas prices are down 28% since February's peak and analysts see another 20% drop coming up in the next few months. A rough estimate of the impact of lower gas prices on consumer spending is that a dime drop translates into $13B back into the wallets of consumers. Companies that could see a boost from the trend include Wal-Mart (WMT), Target (TGT), and Costco (COST) - while ETFs such as Consumer Discretionary Select Sector SPDR (XLY), Vanguard Consumer Discretionary (VCR), PowerShares Dynamic Consumer Discretionary (PEZ), and Market Vectors Retail (RTH) could also benefit.
The beginning of a bigger move? Two of the year's three strongest performing sectors - healthcare (XLV) and consumer staples (XLP) - are down on the week as the three weakest sectors - energy (XLE), materials (XLB), and tech (XLK) - post gains of 3%-4.5%.
"To say that the advance has gotten ahead of fundamentals is an understatement," says iShares' Russ Koesterich, suggesting investors lighten up on red-hot consumer staples (XLP, IYK) holdings. He questions the conventional wisdom saying staples are not immune to consumer spending slowdowns, and further, he argues, how many companies are really pure staples plays?
The Senate yesterday voted 74-20 to limit debate on legislation that would force retailers to collect taxes for online sales, opening the way for a final vote on the measure, which could take place this week. The White House officially backed the bill for the first time, although its prospects in the House are uncertain even if its passes the Senate.
The XLP, XRT, and XLY all give up gains and turn lower following Wal-Mart sounding the warning over the effects of the payroll tax hike. It's fascinating that it took markets until just now to react to what was crystal clear 6 weeks ago.
Retail ETFs (XRT, XLY, PMR, RTH) suddenly look a bit more attractive with a rush of department stores reporting stronger-than-expected January same-store sales. Though part of the gains were from a calendar effect and pent-up demand due to the fiscal cliff drama, in the larger context key firms (JWN, M, URBN) are proving that their omni-channel approach to sales through seamlessly tying in mobile devices to web and brick-and-mortar strategy is working.
Retail analysts start to get a little edgy after an early round of reports on holiday sales (Aeropostale, Tiffany, Ascena Retail Group) show considerable weakness in consumer spending. It's still early in the reporting season, but the early tone flowing out from the sector doesn't bode well for retail-focused ETFs such as XRT, XLY, PMR, and RTH.
A number of retail stocks aren't taking part of the broad market rally today with concerns over "paystub sticker shock" from consumers and anxiety over upcoming sales reports outweighing the buzz over the U.S. averting the fiscal cliff. Notable laggards: M -1.0%, JWN -0.3%, WMT +0.5%, KSS -1.2%, DDS -0.5%.