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
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,
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
. 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
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
. 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) - Get Report, 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) - Get Report, 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) - Get Report holds retailers like Nordstrom (JWN) - Get Report and Gap (GPS) - Get Report, two companies that have performed relatively well. PMR is up 32% over the last year and closed at $18.94 on Wednesday.
Although most retailers are outperforming Wall Street's expectations, the sector is highly dependent on consumer confidence and consumer spending. A recent study conducted by the Reuters/University of Michigan Consumer Sentiment Index for April illustrated that retail spending is weak and will likely remain weak. The study suggests that personal financial conditions for consumers are deteriorating rather than improving at a ratio of 2-to-1, a trend that will likely put a damper on the retail sector.
Other potential threats that face the sector are unstable labor and credit markets. As long as these potential threats are present, a sustainable uptrend in the retail sector remains questionable.
A good way to protect against these threats is through the implementation of an exit strategy which identifies price points at which an upward trend could come to an end.
According to the latest data at
, these price points are: RTH at $102.66, XLY at $34.43, PMR at $18.85.
Written by Kevin Grewal in Laguna Niguel, Calif.
At the time of publication, Grewal had no positions in the securities mentioned
Kevin Grewal serves as the editorial director and research analyst at The ETF Institute, which is the only independent organization providing financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). Additionally, he serves as the editorial director at SmartStops.net where he focuses on mitigating risks and implementing exit strategies to preserve equity. Prior to this, Grewal was an analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds a bachelor's degree from the University of California along with a MBA from the California State University, Fullerton.