Wal-Mart Q1 Bucks Weak Retail Trend: ETFs To Surge

Amid a spate of disappointing earnings reports from departmental stores and traditional brick-and-mortar operators, Wal-Mart (WMT - Analyst Report) spread an air of optimism with solid Q1 results. This is especially true as the world's largest retailer edged past our earnings and revenue estimates, and provided an upbeat outlook for the ongoing second quarter (read: Retailers Sink: Alarm Bell Ringing for ETFs as Q1 Unfolds?).

Earnings per share came in at 98 cents, beating the Zacks Consensus Estimate by 10 cents but declining from the year-ago earnings of $1.03. Revenues inched up 0.9% year over year to $115.9 billion and surpassed our estimate of $112.7 billion.

Robust results came on the back of Wal-Mart’s two-year spending spree on global e-commerce initiatives, wage structure, and workers’ training that have now started to pay off. At the annual investor day last October, the company had stated that higher wages and training costs could dilute earnings by 30 cents per share for the fiscal full year, while currency might hurt earnings by 10 cents. As a result, revenues are expected to be flat and earnings per share will be in the range of $4.00–$4.30 for the year.

The mega retailer expects second-quarter earnings per share in the range of $0.95–$1.08; the midpoint of which is much above the Zacks Consensus Estimate of 99 cents (see: all Consumer Staples ETFs here).  

Market Impact

Following upbeat results, shares of WMT jumped 9.6% on the day, reflecting the biggest one-day gain in more than seven years, on elevated volumes of more than three times the normal day. This trend will continue at least in the near term given that the stock has a Zacks Rank #3 (Hold) with VGM Style Score of ‘A’. The smooth trading will also push up the consumer ETFs with the largest allocation to this retail giant in the days ahead. Below, we have highlighted some of them:

Market Vectors Retail ETF (RTHRTHRTH - ETF report)

This fund tracks the Market Vectors US Listed Retail 25 Index and holds about 26 stocks in its basket with AUM of $135.4 million. Average daily volume is moderate at around 55,000 shares while expense ratio came in at 0.35%. In terms of holdings, WMT is the third firm making up for 7.1% of assets while sector wise, specialty retail takes the largest share with 29% of assets, followed by double-digit allocation to Internet and catalogue retail, hypermarkets, drug stores, and health care services. The fund added 1% following Walmart earnings and has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a Medium risk outlook (read: Retail Sales Back to Health; ETFs to Watch).
 
Consumer Staples Select Sector SPDR Fund (XLP - ETF report)
 
This is the most popular consumer staples ETF that follows the Consumer Staples Select Sector Index and has about $9.2 billion in its asset base. The fund charges 14 bps in fees per year from investors and trades in heavy volume of nearly 12.8 million shares a day. In total, the fund holds about 39 securities in its basket with Wal-Mart taking the sixth spot at 5.4%. From a sector look, food and staples retailing takes the top spot at 23% while beverages, household products, food products and tobacco accounting for a double-digit allocation each. XLP has gained 1% on the day and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook (read: Democrats Likely to Win 2016 Election: ETFs to Benefit).
 

Fidelity MSCI Consumer Staples Index ETF (FSTA - ETF report) 

This fund tracks the MSCI USA IMI Consumer Staples Index, holding 101 stocks in its basket. Out of these, WMT takes the seventh spot with 5.1% share. Beverages, and food and staples retailing make up for the top two sectors with 22% share each, followed by food products (19.4%), household products (18.2%), and tobacco (16.3%). The product has amassed $257.9 million in its asset base while trades in a good volume of around 102,000 shares a day on average. It charges 12 bps in annual fees from investors. The fund was up 0.8% following WMT results and has a Zacks ETF Rank of 3 with a Medium risk outlook.
 
Vanguard Consumer Staples ETF (VDC - ETF report)
 
This fund manages a $3.1 billion asset base and has exposure to a basket of 97 consumer stocks by tracking the MSCI US Investable Market Consumer Staples 25/50 Index. It is the low cost choice in the consumer staples space, charging a fee of just 10 bps per year and trading in a good volume of around 148,000 shares. Here, WMT occupies the seventh position in the basket with 4.4% allocation. The product is widely spread across packaged foods and meat, household products, soft drinks, and tobacco that make up for a double-digit allocation each. The fund added 0.7% on the day and has a Zacks ETF Rank of 3 with a Medium risk outlook.