Concerns related to U.S.-China trade tiff, volatility in crude prices, sluggish business spending and certain geopolitical problems are enough to dampen consumers’ enthusiasm ahead of the holiday season. In fact, imposition of tariffs has left some of the retailers with no other choice than to go for selective price increases. These may have a direct bearing on consumer spending, which remains one of the pivotal factors driving the economy.
Well if consumers choose to tighten purse strings and curtail their discretionary spending, retailers have to tough it out this shopping season. Apart from these, a strong U.S. dollar is likely to hit tourism, while a warmer winter may impact the sale of seasonal apparel and merchandise. Again, retailers will get six fewer days between Thanksgiving and Christmas this time compared with last year.
Undoubtedly, the sector’s prospects are closely tied to the purchasing power of consumers. Well consumers remain in good shape, courtesy of a solid job market as evident from the 50-year low unemployment rate of 3.5% in September. Further, the economy added a modest 136,000 jobs last month. Moreover, the data for the month of August was revised up to 168,000 from the previously reported 130,000 jobs created. A sturdy labor market is likely to stimulate consumer spending during the festive season.
Going by National Retail Federation’s ("NRF") recent holiday sales projection, retailers are all set to revel again in the euphoria of the upcoming festive season. Markedly, NRF now envisions holiday retail sales to advance 3.8-4.2% this season (excluding automobiles, restaurants and gasoline). Online and other non-store sales are expected to grow 11-14%. Last year, holiday sales rose just 2.1%, per NRF.
Further, data compiled by Deloitte indicates that holiday sales are expected to increase 4.5-5% and exceed $1.1 trillion between November 2019 and January 2020. Meanwhile, e-commerce sales are estimated to improve 14-18% to reach $144-149 billion. Numbers look robust compared with last year, when sales in December were affected by U.S. government shut down, battered stock market and increase in consumer savings.
The aforementioned discussion clearly suggests that consumers will splurge, in spite of the lingering issues. Here we have highlighted four retail stocks based on a favorable combination of a Zacks Rank #1 (Strong Buy) or 2 (Buy), and VGM Score of A or B.
4 Prominent Picks
Zumiez Inc. ZUMZ, which operates as a specialty retailer of apparel, footwear, accessories, and hardgoods, is a solid bet with a long-term earnings growth rate of 12%. This Zacks Rank #1 company has an average positive earnings surprise of 60.9% in the trailing four quarters. Moreover, the Zacks Consensus Estimate for its current-year earnings suggests a year-over-year improvement of 20.7%. The stock, with a VGM Score of A, has advanced 57.1% so far this year. You can see the complete list of today’s Zacks #1 Rank stocks here.
You can also consider RH RH, a home furnishing retailer, with a Zacks Rank #1 and a VGM Score of B. The company has an average positive earnings surprise of 20.2% in the trailing four quarters. Moreover, the Zacks Consensus Estimate for its current-year earnings suggests a year-over-year improvement of 26.6%. We note that the stock with a long-term earnings growth rate of 12.5% has rallied 45% year to date.
Lithia Motors, Inc. LAD, an automotive retailer, is another attractive option. The stock has a VGM Score of A and long-term earnings growth rate of 9.2%. This Zacks Rank #2 company has an average positive earnings surprise of 8% in the trailing four quarters. Moreover, the Zacks Consensus Estimate for its current-year earnings indicates a year-over-year improvement of 12.9%. We note that the stock has surged 58.6% year to date.
Investors can also count on Target Corporation TGT, which offers beauty and household essentials, food assortments, apparel and home decor products. This Zacks Rank #2 company has a long-term earnings growth rate of 7.1% and a VGM Score of A. It has soared 64.2% so far in 2019. Moreover, the company has an average positive earnings surprise of 4.6% for the trailing four quarters. Further, the Zacks Consensus Estimate for its current-year earnings suggests a year-over-year improvement of 14.1%.
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