U.S. retail sales rose in January, as people went on to buy electronics and appliances, spend more at restaurants and gasoline stations, and bought a range of other goods. This indicates that the economy is quite steady at the moment and is ready for a big transition from Obama’s administration to Trump’s regime. An improving job scenario, rising wages and spiraling confidence led consumers to spend more and the result is visible.
The Commerce Department stated that U.S. retail and food services sales for the first month of 2017 increased 0.4% to $472.1 billion, following a revised upward reading of 1% growth registered in December. Retail sales increased 5.6% from Jan 2016. This shows that consumer spending – accounting for over two-thirds of U.S. economic activity and one of the pivotal factors driving the economy – remains strong.
The report suggested that sales at auto dealers declined 1.4%, while receipts at gasoline stations advanced 2.3% due to higher fuel prices. Excluding motor vehicles and automotive parts, sales rose 0.8% last month. Sales at non-store retailers remained flat in January but increased 12% from the prior-year period.
The recent rebound in oil prices, an encouraging employment picture, and a gradual improvement in the manufacturing sector and housing market signal that the economy is on a recovery mode.
According to the “advance estimate” unveiled by the Bureau of Economic Analysis, the U.S. economy expanded 1.9% in the final quarter of 2016. Moreover, the economy added 227,000 jobs in January, while the unemployment rate was at 4.8%. The favorable economic scenario may prompt the Federal Reserve to increase the benchmark interest rate at least twice this year.
How is the Sector Placed?
Although, the Retail-Wholesale sector has not been an outstanding performer, it still holds some promise, given the favorable economic indicators. Moreover, friendlier fiscal and regulatory policies from the incoming administration also bode well for the sector. According to the latest Earnings Outlook report, as of Feb 15, 2017, the sector is expected to record top and bottom-line growth of 4.4% and 9.2%, respectively.
However, we understand that the space is not fully immune to global uncertainties, which could limit growth. We note that in the past one year, the sector has registered an increase of 14.7% compared with the S&P 500 that was up 20.4%. Moreover, from a valuation perspective too, the sector looks quite stretched.
Looking at the sector’s price-to-earnings (P/E) ratio it looks pretty overvalued when compared with the S&P 500. The sector currently has a trailing 12-month P/E ratio of 25.78. This compares unfavorably to an extent with what the sector saw in the last two years. The ratio is higher than the median level of 25.38 and almost near its high of 26.36 over this period. On the contrary, the trailing 12-month P/E ratio for the S&P 500 is 19.96.
We remain cautiously optimistic about the sector’s overall performance going forward. A challenging retail landscape, stiff competition and waning store traffic have compelled retailers to revisit their strategies. They are now focusing more on enhancing their omni-channel capabilities, optimizing store fleet and restructuring activities.
Retailers are efficiently allocating a large chunk of their capital toward a multi-channel growth strategy focused on improving merchandise offerings, developing IT infrastructure to enhance the web and mobile experience of customers, renovating stores, developing fulfillment centers to enable speedy delivery, implementing an enterprise-wide inventory management system as well as enhancing their relationship with existing and new customers.
Among the aforementioned stocks, Zumiez sports a Zacks Rank #1 (Strong Buy), while Dollar Tree and Staples hold a Zacks Rank #2 (Buy). Both Michael Kors and Macy’s carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.
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