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Retail in Uptrend But Gains Fragile

Stocks in this article: RTH XLY PMR

NEW YORK ( TheStreet) -- The retail sector as a whole is in an uptrend pushing prices near 52-week highs, but spending and consumer confidence remain wary making these gains somewhat fragile.

Most recently, home improvement giant Home Depot (HD) posted its first quarterly profit growth in more than three years, beating analysts' expectations and painting a rosy picture. To make things even more appealing, the Atlanta company boasted an increase in same-store sales of 1.2% in the fourth quarter, driven primarily by growth in international markets. As for the future of the retailer, the expected expiration of the homebuyers' tax credit is likely to have an impact on future earnings.

In the department store subsector, Macy's (M) swung to a quarterly profit, beating analyst expectations. However, the profitable quarter generated by the second-largest department store chain was driven by cost-cutting measures and not revenue growth. In fact, sales slipped by 1% for the quarter and 6% for the year, indicating that consumers are still reluctant to spend. A similar story was seen in the latest quarterly earnings reports from Sears Holdings (SHLD). The department store beat analysts' expectations, but continued to witness a decline in sales, due in large part to dampened demand for home appliances, lawn and garden goods and electronics.

The trend of beating analysts' expectations continued on to Internet retailers as Amazon's (AMZN) first-quarter profits rose 69%, with sales increasing nearly 40%. Amazon's Kindle contributed significantly to the company's sales growth and is likely to continue to do so.

Another major retail outfit to witness both revenue and earnings growth was Target (TGT). The company boasted earnings growth of 54% from a year ago, revenue growth of 3% and same-store sales growth of 0.6%. As for the future of Target, the company's outlook seems relatively promising, especially due its recent announcement of being the first bricks-and-mortar retailer to sell Amazon's Kindle and the fact that consumers are still reluctant to spend, boosting the appeal of discount retailers.

This recent outperformance and uptrend in the sector can truly be seen in the performance of the following ETFs:

  • Retail HOLDRs (RTH), which boasts Home Depot, Amazon and Target in its top holdings. RTH is up 37% over last year and is flirting with its 52-week high. The ETF closed at $104.27 on Wednesday.
  • Consumer Discretionary Select Sector SPDR (XLY), which also holds Home Depot, Amazon and Target in its top holdings. XLY is up 57% over the last year, is trading close to its 52-week high and closed at $34.79 on Wednesday.
  • PowerShares Dynamic Retail (PMR) holds retailers like Nordstrom (JWN) and Gap (GPS), two companies that have performed relatively well. PMR is up 32% over the last year and closed at $18.94 on Wednesday.

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