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Is the Retail Picture Truly Gloomy? ETFs in Focus

Sanghamitra Saha

Retail sales in the United States dropped 0.3% sequentially in September 2019, after an upwardly revised 0.6% uptick in August. Sales also lagged market expectations of a 0.3% increase. It was the first and largest slump in retail sales since February, mainly owing to lower dollar value sales of motor vehicles, building materials, hobbies and online purchases. About seven out of 13 major retail categories exhibited sequential declines (read: ETFs & Stocks to Defy Weak September Retail Sales).

Time to be Cautious About Retail Backdrop?

We need to see some more months of data before being sure of a retail slowdown. Investors should note that receipts at motor vehicle & parts dealers may have dropped 0.9% in September, unit vehicle sales rose in September, per figures from Autodata, as quoted on Wall Street Journal.

The National Association of Home Builders said “its housing-market index rose three points in October, to 71 from a revised level of 68 in September, reflecting an increase in U.S. home-builder confidence.” This may result in a rebound in building material and gardening equipment in the coming months.

Online and mail-order retail sales declined 0.3%, the sharpest since December 2018. But this came after a 1.2% uptick in August. Investors should note that online retailing does good business almost throughout the year, thanks to a deluge of deals.

Amazon’s AMZN Prime Day in July, for example, compelled many retailers like Target TGT, Walmart WMT, eBay EBAY, Nordstrom JWN and Kohl’s KSS to offer steep discounts on a variety of goods. 

In fact, July saw a surge in shopping this year. Amazon smashed records with its annual Prime Day 2019 sales surpassing last year’s combined Black Friday and Cyber Monday sales. All these factors have probably pushed forward some of the sales to July (read: Consumer ETFs Win on Prime Day Becoming "Summer's Black Friday").

This is the reason why an analysis by Coresight Research shows a slowing momentum of holiday season buying over the years, per the market researcher. Per the research firm, sales have been spread throughout the year in recent times rather than being focused on the holiday season (read: Is Holiday Season Frenzy Fading for Retail ETFs?).

Also, online sales still occupy a less-significant portion of the total retail sales. Notably, ecommerce made up about 14.3% of total retail sales in 2018 in the United States, according to Internet Retailer’s analysis.

Investors should also note that retail sales data for August was revised up to a gain of 0.6% instead of 0.4% as previously reported. Sales rose 1.5% in the third quarter compared with the previous three months, per Wall Street Journal.

Outlook for Q3 Appears Decent

Revenues of the sector are expected to expand 8.4% in Q3 followed by 7.6% expansion in Q2. Earnings are expected to decline 0.5% in Q3, after growth of 3.4% in, per the Zacks Earnings Trends issued on Oct 9, 2019 (read: Tap Revenue Growth With These ETFs & Dump Earnings Recession).

What is Actually Worrisome?

Higher U.S. tariffs on Chinese imports are actually a cause of concern. Per an article published on Wall Street Journal, some retailers have charged higher prices for their products due to raised tariffs. One retailer has suggested that such price hike has resulted in 5% to 10% erosion in sales volume. The retailer still sees the store’s foot traffic as strong and adopts an optimistic outlook into the first quarter of 2020.

Investors should note that “2019 is the shortest possible holiday calendar scenario,” with six fewer days between Thanksgiving and Christmas than in 2018. So, a big leap in holiday season buying is less likely.

Amid this backdrop, investors should thus keep a close tab on retail ETFs like Amplify Online Retail ETF IBUYSPDR S&P Retail ETF XRT, VanEck Vectors Retail ETF RTH and ProShares Online Retail ETF ONLN (see all Consumer Discretionary ETFs here).

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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, Inc. (AMZN) : Free Stock Analysis Report
eBay Inc. (EBAY) : Free Stock Analysis Report
SPDR S&P Retail ETF (XRT): ETF Research Reports
VanEck Vectors Retail ETF (RTH): ETF Research Reports
Amplify Online Retail ETF (IBUY): ETF Research Reports
Nordstrom, Inc. (JWN) : Free Stock Analysis Report
Walmart Inc. (WMT) : Free Stock Analysis Report
Target Corporation (TGT) : Free Stock Analysis Report
Kohl's Corporation (KSS) : Free Stock Analysis Report
ProShares Online Retail ETF (ONLN): ETF Research Reports
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