Traditional retailers barely eked out a passing grade this earnings season, but online retailers came out with strong second-quarter results, boosting internet-specific and e-commerce-related exchange traded fund plays.
Retailers were largely expected to generate a dip in second-quarter earnings year-over-year ahead of the earnings season. Dragging on the sector, recent disappointments include Lowe’s (NYSE: LOW) and Target Corp. (NYSE: TGT) after they fell short of expectations.
However, a handful of better-than-expected results only narrowly missing top estimates helped push overall figures higher. For instance, Kohl’s Corporation (NYSE: KSS) and Macy’s (NYSE: M) both beat retail sales and earnings while J.C. Penney (NYSE: JCP) and Nordstrom (NYSE: JWN) outdid their consensus mark on the bottom line but missed top estimates. Moreover industry giant Wal-Mart (NYSE: WMT) also beat analysts’ forecasts.
Overall earnings, though, are barely inching higher and same-store sales remain anemic. Weighing on the broader consumer discretionary sector, competitive pressures have tied down traditional brick and mortar companies while lower guidance due to weaker demand has dragged on apparel and luxury items. According to Retail Metrics data, the overall retail earnings growth remains below the 2.8% average since 2000.
On the other hand, online retail outlets or the e-commerce business seems to be flourishing. Amazon (NasdaqGS: AMZN) revealed strong quarterly growth in both earnings and revenues. Online bazaar eBay (NasdaqGS: EBAY) impressed investors after management raised guidance and reported revenue beats. Chinese e-commerce behemoth Alibaba Group Holding Ltd. (NYSE: BABA) showed second quarter earnings beat estimates with revenue above the consensus.
Observers have pointed to blow-out events like Amazon’s Prime Day sale on July 12 as large selling points to attract greater consumer interest, supporting the notion that consumers have shifted their spending habits. Wal-Mart has also noticed this ongoing shift and is acquiring e-commerce retailer Jet.com to bolster its online presence.
Since 1999, online sales have grown at 20% compound annual growth rate while brick-and-mortar stores have actually seen sales dip. According to the US Department of Commerce’s latest quarterly retail e-commerce report, 7.5% of all U.S. retail sales are being done via e-commerce, so the industry has a lot of room to grow.
With online retailers enjoying greater interest, investors may turn to related internet and e-commerce ETFs to gain exposure to the rapid growth.
Along with large internet tech names like Facebook (NasdaqGS: FB) and Alphabet (NasdaqGS: GOOG), PNQI has a 35.3% tilt toward the internet & catalog retail sub-sector, including 8.6% Priceline Group (NasdaqGS: PCLN), 8.0% AMZN, 3.9% JD.com (NasdaqGS: JD), 4.7% EBAY and 3.6% Netflix (NasdaqGS: NFLX), among others.
FDN also allocates 20.0% to consumer discretionary, including top holdings like 10.0% position AMZN, 4.5% EBAY and 4.3% to NFLX.
ETF investors can also take the sector-specific approach through the Amplify Online Retail ETF (NasdaqGM: IBUY), which targets the performance of the EQM Online Retail Index. IBUY is comprised of global companies that generate at least 70% of revenue from online or virtual sales.
SEE MORE: IBUY – A Dedicated E-Commerce ETF
The online retail ETF includes a 59% tilt toward traditional retailers, 28% to marketplace segment and 13% to travel. Top holdings include GrubHub (NYSE: GRUB) 3.9%, 1800FLowers.com (NasdaqGS: FLWS) 3.7% and Etsy (NasdaqGS: ETSY) 3.6%, along with 3.1% AMZN, 3.1% EBAY, 1.3% BABA and 1.2% JD.
The e-commerce ETFs has been outperforming retailers. Over the past three months, IBUY increased 13.5%, whereas the SPDR S&P Retail ETF (NYSEArca: XRT), the largest dedicated retail ETF, rose 11.8%. Meanwhile, the broader Consumer Discretionary Select Sector SPDR (NYSEArca: XLY), which includes an 18.4% tilt toward internet & catalog retail sub-sector, along with a 12.7% position in AMZN, only rose 5.3% over the past three months.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.