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Buy These 4 Retail Growth Stocks to Alleviate Soft Sales Woes

Sumit Singh
Simon Property's (SPG) Q1 performance reflects increased occupancy and leasing spread per square foot at the company's U.S. malls and Premium Outlets.

Apart from lower consumer confidence in March owing to volatility in the stock market, slowing global economy, disappointing February jobs report and partial government shutdown, retailers were also affected by sluggish sales. We note that retail sales fell in the month of February, as Americans refrained from splurging on furniture, electronics and appliances, grocery stores, clothing as well as building materials and gardening equipment.

These lead to a concern that the U.S. economy may have lost steam in the first quarter. Also, fears of a possible recession, given the yield-curve inversion, lately gripped the stock market. Further, the Fed adopted a more dovish stance and decided not to raise the benchmark interest rate in 2019, after raising the same four times last year. The policymakers also trimmed growth projection for the economy.

Retail Sales Topple

The Commerce Department stated that U.S. retail and food services sales in February fell 0.2% to $506 billion, following an upward revision of 0.7% gain in January. Analysts pointed that the weak sales data could be partially related to delay in tax refund processing. Nevertheless, retail sales improved 2.2% from February 2018.

The report suggests that sales at furniture & home furnishing stores and building material dealers fell 0.5% and 4.4%, respectively. Sales at electronics & appliance stores slid 1.3%, while at food & beverage stores the same declined 1.2%. Sales at clothing & clothing accessories stores dropped 0.4%, while at general merchandise store it fell 0.3%.

We note that sales at motor vehicles and parts dealers rose 0.7%, while at health & personal care stores the metric grew 0.6%. Meanwhile, sales at sporting goods, hobby, book & music stores inched up 0.5% and receipts at gasoline stations increased 1%. Sales at non-store retailers climbed 0.9% and also improved 10% from the prior-year period. Sales at food services & drinking places grew 0.1%.

A Brief Introspection

Market experts cited that various macro and micro issues as mentioned above have been impacting consumer behavior. These factors have a direct or an indirect bearing on consumer sentiment. Per the latest Conference Board data, the Consumer Confidence Index dropped to 124.1 in March from February’s reading of 131.4.

A fall in consumer sentiment is likely to impact consumers’ spending pattern, which accounts for over two-thirds of the U.S. economic activity. Undoubtedly, reluctance on the part of consumers to spend more is the last thing retailers want.

Nonetheless, some experts still believe that the U.S. economy remains fundamentally sound. Moreover, the National Retail Federation’s projection of a tick-up in U.S. retail sales in the band of 3.8-4.4% to more than $3.8 trillion in 2019 hints at increasing basket size and more traffic with retailers as ultimate gainers.

Per the latest Earnings Preview, the Zacks Retail & Wholesale Sector is likely to register top and bottom-line growth of 7.3% and 3.6%, respectively, in the first quarter of this year. The sector has showcased an improvement of 11% in a year, outperforming the S&P 500’s rally of 9%.

4 Prominent Picks

Here we have highlighted four Retail-Wholesale stocks with a favorable combination of a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a VGM Score of A or B. You can see the complete list of today’s Zacks #1 Rank stocks here.

America's Car-Mart, Inc. CRMT, an automotive retailer, is a solid bet with a long-term earnings growth rate of 18.9% and a VGM Score of B. This Zacks Rank #1 company has delivered average positive earnings surprise of 42.2% in the trailing four quarters. Moreover, the stock has soared approximately 79% in a year.

AutoZone, Inc. AZO, which retails and distributes automotive replacement parts and accessories, is a solid pick with a Zacks Rank #2 and a VGM Score of A. The stock has a long-term earnings growth rate of 12% and increased 66% in a year. It has recorded average positive earnings surprise of 8.1% in the trailing four quarters.

Investors can also count on Darden Restaurants, Inc. DRI, which owns and operates full-service restaurants. This Zacks Rank #2 company has a long-term earnings growth rate of 10.3% and a VGM Score of B. The company has delivered average positive earnings surprise of 3.7% in the trailing four quarters and advanced about 43% in a year.

You can also add Costco Wholesale Corporation COST to your portfolio. The company’s shares have surged about 34% in a year. This operator of membership warehouses has a VGM Score of B and a long-term earnings growth rate of 8.9%. This Zacks Rank #2 company delivered average positive earnings surprise of 5.5% in the trailing four quarters.

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