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Will Soft May Retail Sales Make Investors Revisit Portfolio?

Zacks

Two things will catch investor attention today and may lead to conflicting sentiments. While soft May retail sales data may ring alarm bells, the Fed’s decision to lift benchmark interest rate to a range of 1–1.25% may serve as a reassurance that all’s well with the economy. The policy makers, who advocated one more hike before the end of the year, also chalked out a detailed plan to shrink $4.5 trillion portfolio of Treasury bonds and mortgage-backed securities in a phased manner.

We believe the Fed chair, Janet Yellen, will steadily raise interest rate after taking into account underlying inflation and the condition of the labor market. But, for now, soft retail sales may compel investors to revisit their portfolio.

Retail Sales Fall

U.S. retail sales in May recorded the steepest drop in 16 months, reflecting a scenario where consumers are curtailing their spending. This raises doubts as to whether economic growth has somewhat tempered in the current quarter, at a time when things have just started to look up under the Trump regime with major markets scaling new highs. The dismal sales report comes on the heels of the soft job addition witnessed last month.


The Commerce Department stated that U.S. retail and food services sales in May declined 0.3% to $473.8 billion – following an unrevised reading of 0.4% growth registered in April – as people refrained from buying motor vehicles and spent less at gasoline stations, department stores and electronics shops . However, retail sales increased 3.8% from May 2016.

The report suggests that sales at motor vehicles and parts dealers declined 0.2%, while receipts at gasoline stations fell 2.4%. Sales at electronics & appliance stores dropped 2.8%. Department store sales decreased 1%. Sales at non-store retailers however inched up 0.8% in May and increased 10.2% from the prior-year period.

How is the Retail Sector Placed?

The Retail-Wholesale sector, which is at the bottom 19% of the Zacks Sector Rank (13 out of 16), has been undergoing a fundamental change. With a digital transformation in shopping and consumers splurging online, store and mall traffic has been hit hard. As a result, most retailers, including big-box, are struggling to compete with e-commerce channels and are being forced to trim their store count to focus more on an online model.

Nevertheless, the sector still holds some promise, given the favorable economic indicators. We note that so far in the year, the sector has registered an increase of 15.2% compared with the S&P 500 that was up roughly 9.3%. The rebound in oil prices from all-time lows, decelerating unemployment rate, and a gradual improvement in the housing market signal that the economy is on a recovery mode. These factors are playing a crucial role in raising consumers’ confidence. We expect this positive sentiment to translate into higher consumer spending.

Strategies to Counter the Challenges

The sector, which is grappling with multiple challenges as mentioned above, has compelled retailers to reconsider 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.

The Children's Place, Inc. PLCE, Best Buy Co., Inc. BBY, Dollar Tree, Inc. DLTR, Staples, Inc. SPLS, Macy's, Inc. M and other renowned retailers are trying all means to reach their target customers.

Zacks Rank

Among the aforementioned stocks, The Children's Place and Best Buy sport a Zacks Rank #1 (Strong Buy), while the remaining stocks carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

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