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Downward Spiral in Retail Sales May Worry Investors, Fed


U.S. retail sales fell for the second straight month in June, reflecting a scenario where consumers are reining in their spending. This casts a doubt over the expected rebound in the economy during the second half of 2017. The dismal sales report overshadowed steady job additions and gradual wage acceleration. Fed officials definitely have their eyes on the latest developments in the economy and the recent event may influence their future action plan. For now, soft retail sales may compel investors to revisit their portfolio.

The Commerce Department stated that U.S. retail and food services sales in June declined 0.2% to $473.5 billion – following a revised reading of 0.1% decrease registered in May – as people curtailed their spending on clothes and spent less at gasoline stations, department stores and restaurants. However, retail sales increased 2.8% from Jun 2016.

The report states that sales at clothing & clothing accessories stores declined 0.1%, while receipts at gasoline stations fell 1.3%. Sales at food & beverage stores dropped 0.4%. Department store sales decreased 0.7% and were down 3.9% from the prior-year period. Sales at non-store retailers, however, inched up 0.4% in June and increased 9.2% from the prior-year period.

The abovementioned data strongly suggests that consumer spending, which plays a pivotal role in driving the economy, lost momentum. The Fed, which raised the benchmark interest rate in June for the second time in 2017, will certainly consider the retail sales report while contemplating an interest rate hike.

Current Retail Landscape

The Retail-Wholesale sector, which is at the bottom 6% of the Zacks Sector Rank (15 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 15.1% compared with the S&P 500 that has risen roughly 10%. 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 that rose to 118.9 in June from May’s reading of 117.6.

Strategies to Counter the Challenges

The multiple challenges in the sector, as mentioned above, have 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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