Forget Wal-Mart, Buy These Retail Stocks Instead

Zacks

Most retailers got off to a weak start in 2014. Extended winter weather due to ice storms that hit the U.S. resulted in frequent store shutdowns and disrupted usual shopping trends. A volatile retail sales environment and lower consumer confidence adversely impacted traffic. Winter woes continued to affect the heath of retailers like Wal-Mart Stores, Inc. (WMT), Kohl’s Corporation (KSS), Macy’s Inc. (M), Bebe Stores, Inc. (BEBE) and Myers Industries Inc. (MYE) in their last reported quarter.

While Kohl’s first-quarter fiscal 2014 earnings missed the Zacks Consensus Estimate and prior-year quarter earnings due to lower sales and higher operating expenses, Macy’s first quarter 2014 earnings were ahead from both the Zacks Consensus Estimate and the prior-year quarter owing to effective cost management and share repurchase activity.

Myers also posted dismal first quarter 2014 results due to harsh weather, while Bebe Stores’s poor third quarter fiscal 2014 results were impacted by severe winter weather leading to store closures and the shift of Easter into late April.

However, Walmart’s challenges were far more than seasonal. Higher-than-expected operating expenses related to harsh weather conditions and higher-than-anticipated effective tax rate hurt earnings in the recently reported first quarter fiscal 2015 (ending Apr 30, 2014). Sales in the international segment were down due to currency headwinds and sluggish consumer spending environment in both mature and emerging markets.

The discounter's U.S. same-store sales declined 0.1% year over year, while traffic slid 1.4%. In fact, U.S. same-store sales have been going downhill for the last five quarters. Sam’s Club's comps also declined 0.5% due to lower average ticket and traffic. The overall softness in the first quarter led to a weak second quarter outlook for this retailer.

Walmart’s results have been weak over the past several quarters as its core low-income consumers continue to struggle with limited wage gains and reductions in benefits like food stamps.

While the leading departmental store chains are suffering due to harsh weather and low consumer spending, there are a few other retail stocks that are doing well amid the challenging retail environment.

Three Retail Stocks to Bank On

Here are three Zacks Rank #2 (Buy) retail stocks with strong earnings momentum, which can turn out to be valuable additions to your portfolio.

We suggest investing in V. F. Corporation (VFC), which is a global leader in branded lifestyle apparel and footwear. Last month, the company posted solid earnings for the first quarter of 2014 and also provided an impressive guidance for the full year. For 2014, it expects revenues to increase at the high end of its previously stated guidance of 7–8%. For the second quarter, the company expects revenue growth to be similar to the first-quarter level, driven by continued strength at the Outdoor & Action Sports coalition.

Though the stock looks a bit pricey with a forward P/E (price-to-earnings) multiple of 20.20x, higher than the peer average of 17.47x, it should not bother investors given the company’s strong fundamentals.

Athletic footwear and apparel retailer Foot Locker, Inc. (FL) is another stock to bet on. Driven by its significant initiatives to achieve its long-term goals, the company posted record fourth-quarter and full year 2013 results in Mar 2014. Going forward, Foot Locker expects to work on its store restructuring plans, increase its investments in technology in Europe and expand its Women’s business. Management is quite optimistic on achieving its operational objectives.

The company is expected to announce first quarter 2014 results on May 23, 2014. Our proven model shows Foot Locker as likely to beat the Zacks Consensus Estimate this quarter as it  has a positive Earnings ESP of +0.95% and a favorable Zacks Rank #2 (Buy). Foot Locker currently trades at a forward P/E of 15.0x, lower than its peer group P/E average of 15.81x.

Another stock that investors may look forward to is Hanesbrands, Inc. (HBI). Though the company’s sales slightly lagged the Zacks Consensus Estimate, Hanesbrands’ first-quarter earnings beat the same by 31.0%. Earnings growth was driven by higher margins attributable to the success of the ‘Innovate-to-Elevate’ strategy.

Increased supply chain operating efficiencies, lower selling, general and administrative costs, and successful integration of the Maidenform Brands (Apr 2014) boosted profits during the quarter. Further, Hanesbrands’ focus on innovation, higher-priced and higher-margin products, lower cotton costs and prudent expense management bode well for future profitability.

Hanesbrands expects the business momentum to continue and consequently upped its guidance for 2014. The company currently trades at a forward P/E of 16.4x, lower than its peer group P/E average of 17.47x. 

Read the Full Research Report on WMT
Read the Full Research Report on VFC
Read the Full Research Report on M
Read the Full Research Report on FL
Read the Full Research Report on BEBE
Read the Full Research Report on KSS
Read the Full Research Report on HBI
Read the Full Research Report on MYE


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