Beware of Renewed Consumer Spending With Regard to Retail Sector ETFs

Includes: JWN, M, PMR, RTH, XRT
by: Kevin_Grewal

Despite a weak job market, consumers opened their wallets and started spending once again, shinning a ray of light on ETFs which track the retail sector, such as the SPDR S&P Retail ETF (NYSEARCA:XRT), the Retail HOLDRs (NYSEARCA:RTH) and the PowerShares Dynamic Retail Portfolio (NYSEARCA:PMR).

According to Thompson Reuters, comparable sales for retail stores open at least a year rose 3.3% in August, better than the 2.5% that was forecasted. Furthermore, it appears that this outperformance in the retail sector came at the expense of consumer savings rates, which dipped by 6% in August.

Incentives such as sales tax holidays along with larger discounts on seasonal clothing further helped in driving sales in the retail sector as consumers appear to be buying more now-wear apparel and putting off other purchases to wait for sales and discounts. Additionally, many retailers have taken on new strategies to move control over merchandising to the local level allowing stores to stock items that are more appropriate for their specific markets. Both Macys (NYSE:M) and Bloomingdales have stated that this strategic move aided in their sales growth.

Nordstrom (NYSE:JWN) is another retailer which beat analyst expectations by posting same-store sales growth of 6.3% for August on implementing a new strategy which included a reduction in price points enabling the company to be more competitive.

Although changes in strategies have enabled some retailers to outperform analyst expectations, the bottom line is that consumers decreased savings to make purchases that have been putting off. As for the future of the retail sector, as long as the labor force remains weak the sector will remain fragile.

If currently invested in the sector, to protect against the downside risk that is evident the use of an exit strategy which identifies specific price points at which downward price pressure is likely to prevail is important.

Disclosure: No positions

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