U.S. Markets open in 20 mins

4 Retail Stocks Likely to Trump Estimates This Earnings Season

Zacks Equity Research
Ignoring the market jitters and speculations, a few stocks have managed to score 10% or more in a month. So, picking up stocks from the space will be a prudent move.

Though the earnings season is well past its peak, a chunk of Retail-Wholesale sector releases are awaited. The sector — comprising apparel & shoes, discount and department stores — has gained around 16.3% so far this year and has outperformed the S&P 500’s 14.3% rise.

Factors Shaping the Outcome

A buoyant consumer environment and strategic endeavors undertaken at the company level are working in favor of the sector. It goes without saying that the sector’s prospects are closely tied to the purchasing power of consumers. In fact, strengthening labor market and rising disposable income are creating an ideal base for higher consumer spending. An uptick in this metric is welcome news for retailers.

Per the Commerce Department, U.S. retail and food services sales in March rose 1.6% to $514.1 billion, as spending on autos, gas stations, apparel stores and home furnishing outlets surged. Retail sales increased 3.6% from March 2018. These favorable factors paint a rosy picture for a number of players this reporting cycle.

Notably, retailers are also making prudent investments, focusing on cost savings and constantly revisiting their loyalty and marketing programs to engage better with customers. These apart, enhancement of omni-channel capacities, introduction of new brands and refurbishment of stores have also been playing crucial roles.

These efforts have been aiding the top line performance for quite some time now, and the to-be-reported quarter is not likely to be an exception. However, one cannot ignore the fact that the sector has turned highly competitive with the increasing dominance of e-commerce players. This has compelled a number of brick-and-mortar players to strengthen their digital ecosystem and bolster shipping and delivery capabilities.

While these endeavors drive sales, they entail high costs. Additionally, any deleverage in SG&A rate, higher labor and occupancy costs, and increased marketing and other store-related expenses are concerns. Margins will remain one of the key areas to watch out for this earnings season.

Number Crunching

Per the latest Earnings Preview, Retail-Wholesale sector is anticipated to witness top-line growth of 7.4%, while the bottom line is projected to increase 9.7% from the year-ago level. The earnings season has witnessed releases from about half of the retail companies in the S&P 500 cohort.

For the 43.6% sector components on the S&P 500 Index that have reported results, total earnings surged 28.5% on 15.1% higher revenues. We note 82.4% of the companies have been successful in beating earnings, while 58.8% triumphed revenue estimates.

The encouraging figures suggest that there are a number of companies likely to beat earnings estimates. Investing in such companies can fetch handsome returns for investors as a stock generally surges upon earnings beat.

Likely Winners for the Season

All said, we used the Zacks methodology and identified retail stocks that not only boast solid fundamentals but are also poised to beat earnings estimates this reporting cycle. Our research shows that for stocks with the combination of a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP, the chance of a positive earnings surprise is as high as 70%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

4 Prominent Picks

Target Corporation TGT is a solid bet with a long-term earnings growth rate of 6.3%. The Zacks Consensus Estimate for the to-be-reported quarter is pegged at $1.42, indicating an improvement of 7.6% year over year. This Minneapolis, MN-based company is slated to report first-quarter fiscal 2019 results on May 22. The general merchandise retailer, has an Earnings ESP of +0.42% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Another lucrative option is Five Below, Inc. FIVE, a specialty value retailer. The stock has a Zacks Rank #3 and an Earnings ESP of +0.64%. The Zacks Consensus Estimate for the first quarter of fiscal 2019 is pegged at 35 cents in line with the year-ago period. The company has an average positive earnings surprise of 9.1% in the trailing four quarters. It has a long-term earnings growth rate of 29.1%.

Costco Wholesale Corporation COST with a Zacks Rank #3 and an Earnings ESP of +1.83%, also deserves a place in your portfolio. The Zacks Consensus Estimate for the to-be-reported quarter is pegged at $1.82, indicating an increase of 7.1% year over year. The company has an average positive earnings surprise of 5.5% in the trailing four quarters. It has a long-term earnings growth rate of 9%. This operator of membership warehouses is slated to come out with third-quarter fiscal 2019 results on May 30.

You may also consider Ross Stores, Inc. ROST with an Earnings ESP of +0.77% and a Zacks Rank #3. The Zacks Consensus Estimate for the to-be-reported quarter is pegged at $1.12, a penny above the year-ago period. The company has an average positive earnings surprise of 3.8% in the trailing four quarters. It has a long-term earnings growth rate of 10.4%. This operator of off-price retail apparel and home fashion stores, is scheduled to come out with first-quarter fiscal 2019 financial numbers on May 23.

Zacks' Top 10 Stocks for 2019

In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-holds for the year?

Who wouldn't? Our annual Top 10s have beaten the market with amazing regularity. In 2018, while the market dropped -5.2%, the portfolio scored well into double-digits overall with individual stocks rising as high as +61.5%. And from 2012-2017, while the market boomed +126.3, Zacks' Top 10s reached an even more sensational +181.9%.

See Latest Stocks Today >>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Target Corporation (TGT) : Free Stock Analysis Report
 
Costco Wholesale Corporation (COST) : Free Stock Analysis Report
 
Ross Stores, Inc. (ROST) : Free Stock Analysis Report
 
Five Below, Inc. (FIVE) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research