Retail Sales Rising, But Not All Retailers Are Seeing the Benefits

It has been a busy week for the retail sector between the monthly retail sales report and earnings reports from numerous companies in the industry. The overall message from all the reports was a little confusing.

The monthly retail sales report showed that July sales were up by 0.5% and that was better than forecast and better than the 0.2% growth in June. If you take autos out of the picture July sales were up 0.6%. When you look at the year over year numbers, core retail sales are up just under 6% and that is just shy of the highest rate in the last ten years.

Given the overall retail sales numbers, you would expect the majority of companies to be reporting strong earnings, but that hasn’t been the case. Yes, there have been a few companies that have issued strong earnings reports, but more have disappointing.

Walmart (NYSE: WMT) was one that was a positive surprise. The company beat the EPS estimates and the revenue estimates. Same-store sales were up 4.5% and that was better than the 2.3% analysts anticipated. In addition, the company raised its guidance for the year. The stock jumped 9.3% on Thursday thanks to the earnings surprise.

The growth in earnings and the raised guidance proves to a degree that companies like Walmart can coexist with Amazon. There have been several instances where stocks and entire sectors drop after Amazon announces plans to enter a market. Just look at what happened to stocks in the grocery store industry last summer when Amazon bought Whole Foods.

Another company that had a positive surprise was on the opposite end of the retail spectrum and that was Nordstrom (NYSE: JWN). The Seattle-based company also beat analysts’ estimates for EPS, revenue, and same-store sales. The high-end retailer’s stock jumped over 11% on Friday morning.

Among the stocks that issued disappointing results were JC Penney (NYSE: JCP) and Macy’s (NYSE: M). Penney missed on earnings, revenue, and same-store sales, and the company lowered its guidance for the year. The stock dropped 27% on Thursday and is now trading below $2.00 a share.

Macy’s beat analysts’ EPS estimates and revenue estimates, but the company saw a decline in sales. Investors weren’t happy with the decline in sales and the stock dropped 15.9% on Thursday. Prior to the big drop on Thursday, Macy’s was up close to 70% for the year.

There doesn’t seem to be much rhyme or reason to the earnings reports and the reactions in the stock prices. Walmart is at the low end in terms of discount retailers while Nordstrom is at the higher end. Nordstrom, Macy’s and JC Penney are all department stores with locations primarily in malls.

Using the SPDR S&P Retail ETF (NYSE: XRT) as an overall barometer for the industry, retail stocks have been rising over the past year. The XRT is up 32% in the past year compared to a 17% gain for the S&P.

The overall takeaway is that not all retailers are benefitting from the rise in sales. Even looking at the ratings for the individual companies, I couldn’t identify a pattern in how the stocks have performed. If you are looking to invest in the retail sector, your best bet is probably to invest in the XRT rather than one individual company.

The ETF will benefit as long as the retail sales continue to grow as a whole and you won’t be exposed to single-stock risk.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

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