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4 Retail Stocks to Pick as Q2 Earnings Season Comes Knocking

Sumit Singh

With the second-quarter earnings season just around the corner, it’s time to reshuffle one’s portfolio. However, the emerging earnings picture for corporates isn’t very encouraging. Per the latest Earnings Preview report, total second-quarter earnings for the S&P 500 Index are expected to fall 2.9% despite 4.3% revenue growth.

Tough comparisons with last year, when growth was bolstered by the tax cut legislation, were expected to weigh on earnings all along. Moderating economic growth and uncertainty about the global trade regime are not helping matters either.

Where to Focus?

Among the 16 Zacks categorized sectors, we are focusing on Retail-Wholesale, which occupies top 25% position in the list of Zacks sectors (four out of 16). The sector has gained roughly 19% so far in the year, outpacing the S&P 500’s growth of approximately 17.3%.

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.

Per the Commerce Department consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.4% in May supported by 0.5% increase in personal income. April’s revised data also exhibited an increase of 0.6% in consumer spending.

Notably, retailers are making prudent investments, focusing on omni-channel capacities, introducing new brands and refurbishing stores. 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 report, total second-quarter earnings for the sector are expected to be down 0.7% with revenues likely to increase 7.3%. This follows earnings growth of 11.6% on 7.2% higher revenues in the preceding quarter.

Given the current scenario, it will be an arduous task to pick the prospective winners for the season. However, this is where the Zacks methodology comes in handy in identifying stocks that are 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.

Likely Winners for the Season

Chipotle Mexican Grill, Inc. CMG is a solid bet with a long-term earnings growth rate of 19.2%. The Zacks Consensus Estimate for the to-be-reported quarter is pegged at $3.71, indicating an improvement of 29.3% from the year-ago quarter. The company has an average positive earnings surprise of 12% in the trailing four quarters. This Newport Beach, CA-based company is slated to report second-quarter 2019 results on Jul 23. The restaurant operator has an Earnings ESP of +7.34% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Another lucrative option is Domino's Pizza, Inc. DPZ, which offers pizzas under the Domino's brand name. The stock has a Zacks Rank #2 and an Earnings ESP of +0.33%. The Zacks Consensus Estimate for the second quarter of 2019 is pegged at $2.00, suggesting growth of 8.7% from the year-ago period. The company has an average positive earnings surprise of 5.7% in the trailing four quarters. The company with a long-term earnings growth rate of 14.7% is scheduled to report on Jul 16.

Tempur Sealy International, Inc. TPX with a Zacks Rank #2 and an Earnings ESP of +6.86%, also deserves a place in your portfolio. The Zacks Consensus Estimate for second quarter of 2019 is pegged at 65 cents, indicating an improvement of 25% from the year-ago reported figure. The company delivered positive earnings surprise of 14.9% in the last reported quarter. This developer, manufacturer and distributor of bedding products has a long-term earnings growth rate of 15%.

You may also consider Walmart Inc. WMT with an Earnings ESP of +0.14% and a Zacks Rank #2. The Zacks Consensus Estimate for second-quarter fiscal 2019 is pegged at $1.21. The company has an average positive earnings surprise of 7.3% in the trailing four quarters. This operator of supercenters, supermarkets, hypermarkets, warehouse clubs and discount stores has a long-term earnings growth rate of 4.7%.

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Tempur Sealy International, Inc. (TPX) : Free Stock Analysis Report
 
Walmart Inc. (WMT) : Free Stock Analysis Report
 
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