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Retail Stocks to Sustain Momentum as Sales Tick Up Again

Zacks

Bargain hunters continue with their shopping spree, as U.S. retail sales tick up again in the month of April, after rebounding sharply in March. Although the rate of sales growth moderated from the prior month, it still clearly indicates that the economy remains well on track after a muted start to the year. Evidently, consumers are splurging on clothing, grocery and furniture.

In spite of recent hiccups in the stock market, Americans look much more confident now buoyed by strengthening labor market, tax reform and rising incomes. Certainly, consumer spending — one of the pivotal factors driving the economy — is likely to remain strong in the months ahead, unless arrested by a spike in gasoline prices that might lower their propensity to consume.

Retail Sales Continue to Pop Up

The Commerce Department stated that U.S. retail and food services sales in April advanced 0.3% to $497.6 billion, following an upwardly revised reading of 0.8% gain in March. Analysts pointed that retail sales remained soft in the months of February and January, as consumers cut back on their spending due to delay in tax refunds. As a result, consumer spending increased 1.1% in the first quarter, marking the lowest growth rate in a span of roughly five years.

Notably, retail sales improved 4.7% from April 2017. The report suggests that sales at motor vehicles and parts dealers inched up 0.1%, while sales at furniture & home furnishing stores rose 0.8%. Meanwhile, sales at both food & beverage stores and building material dealers grew 0.4%. Receipts at gasoline stations rose 0.8%, while sales at clothing & clothing accessories stores improved 1.4%. Sales at non-store retailers climbed 0.6% and surged 9.6% from the prior-year period.

However, sales at sporting goods, hobby, book & music stores dipped 0.1%, while at food services & drinking places the same fell 0.3%. Sales at electronics & appliance stores edged down 0.1%.

Retail Stocks to Continue Momentum

Pick up in retail sales is welcome news for retailers, whose fortunes depend upon consumers’ willingness to spend. A robust job market with unemployment rate at 3.9%, massive tax cuts and sound economic fundamentals are likely to boost consumer confidence. We expect this positive sentiment to translate into higher consumer spending. Certainly, favorable economic indicators along with friendlier fiscal and regulatory policies from the current regime bode well for the sector.

For obvious reasons, retailers are the end gainers. With digital transformation in shopping, retailers are fast adopting the omni-channel mantra to provide a seamless shopping experience, whether online or in-stores. Moreover, National Retail Federation’s projection of an uptick in U.S. retail sales of 3.8-4.4% this year raises optimism. Additionally, the recent cut in corporate tax rate will allow retailers to channelize the surplus money toward best possible alternatives.

Notably, the Retail-Wholesale sector has advanced roughly 10% in the past six months and has comfortably outperformed the S&P 500’s growth of approximately 5%. The sector’s progress card this reporting cycle also looks quite impressive.

Markedly, total earnings of the S&P 500 retailers that have already reported results increased 24.8% on the back of 13.6% jump in revenues, per the latest Earnings Outlook. Well, about half of the retailers in the S&P 500 index released their quarterly outcomes, with 70% topping bottom-line estimates and 60% delivering positive revenue surprise.

Wrapping Up

With several retail behemoths queued up to report their quarterly numbers, the sector is likely to remain in the limelight. So, picking up stocks that are likely to trump estimates will be a prudent move. This is because a stock generally picks up steam on an earnings beat.

These are stocks with a favorable combination of a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP. Well, our research shows that the chance of a positive earnings surprise of stocks with this combination is as high as 70%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Nordstrom JWN has an Earnings ESP of +8.33% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Urban Outfitters URBN has an Earnings ESP of +1.70% and a Zacks Rank #2.

Best Buy BBY has an Earnings ESP of +2.01% and a Zacks Rank #2.

Costco COST has an Earnings ESP of +1.69% and a Zacks Rank #3.

Kroger KR has an Earnings ESP of +4.99% and a Zacks Rank #3.

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