While earnings season has come to an end for most of the sectors, the show is still on for the Retail-Wholesale sector, which occupies the top 44% (7 out of 16) position in the list of Zacks sectors. The sector has advanced roughly 9% in the past six months, comfortably outpacing the S&P 500’s growth of 3%.
Per the latest Earnings Preview, approximately 90% of retailers in the S&P 500 index have already reported quarterly results. Well, roughly 73.5% of these companies have delivered positive earnings surprises, while about 67.7% beat top-line expectations. Earnings of these companies have increased 21.1% from the year-ago quarter, while revenues have risen 9.3%.
Notably, gradual wage acceleration, low unemployment rate of 3.9%, rising consumer sentiment and sound economic fundamentals are working in tandem for the sector. Additionally, the cut in corporate tax rate is allowing retailers to channelize the surplus money toward best possible alternatives. Further, an individual tax cut is also paving way for higher disposable income, which is likely to trigger demand for discretionary items. For obvious reasons, retailers are the end gainers.
Certainly, the sector has borne the brunt of heightened online competition from Amazon AMZN, lower footfall and evolving consumer shopping patterns but retailers have left no stone unturned to rapidly adapt to the changing retail landscape. Rise in online shopping prompted retailers to rapidly enhance omni-channel capabilities, optimize store fleet and undertake restructuring activities.
Our today’s article revolves around three discount store retailers — Costco COST, Dollar General DG and Burlington Stores BURL. We note that the retail-discount industry, which occupies the top 42% (108 out of the 256) position, has rallied approximately 9% in six months comfortably outperforming the S&P 500’s growth.
So, let’s find out what’s special about these three discount retailers.
These three discounters are likely to trump estimates, given a favorable combination of positive Earnings ESP and Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). Our research shows that for stocks with such combination, the chance of a positive earnings surprise is as high as 70%. Moreover, these stocks also look well poised to register year-over-year growth in both top and bottom lines. You can see the complete list of today’s Zacks #1 Rank stocks here.
Let’s analyze them.
Which Factors Hold Key to Costco’s Performance?
Costco, the operator of membership warehouses, is scheduled to come up with third-quarter fiscal 2018 financial results on May 31. The Zacks Consensus Estimate for the quarter is pegged at $1.68, reflecting year-over-year increase of roughly 20%. Analysts polled by Zacks expect revenue of $31.74 billion, up about 10% from the prior-year quarter. Moreover, the stock holds a favorable combination of Zacks Rank #3 and an Earnings ESP of +1.29%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Costco seems somewhat unfazed by tough retail scenario. The company’s growth strategies, sturdy comparable-store sales performance, strong membership trends and higher penetration of Citi Visa co-brand card program are the pillars that reinforce its position. The company’s strategy to sell products at heavily discounted prices has helped it to remain on growth track. We are also encouraged by Costco’s expansion strategy, as it remains committed to opening new clubs and expanding e-commerce capabilities.
What Will Drive Dollar General’s Results?
Dollar General, which is slated to report first-quarter fiscal 2018 results on May 31, is a solid bet. The Zacks Consensus Estimate for the quarter is pegged at $1.40, reflecting an increase of approximately 36%. Revenue is expected to come in at $6,189 million, up 10.3% from the year-ago period. This discount retailer has a Zacks Rank #2 and an Earnings ESP of +0.95%.
Dollar General’s commitment toward better price management, cost containment, private label offering, effective inventory management, merchandise and operational initiatives should drive sales and margin trends. This is quite evident from the aforementioned Zacks Consensus Estimate. Moreover, in order to increase traffic, Dollar General is focusing on both consumables and discretionary categories. Additionally, the company is expanding its cooler facilities to enhance the sale of perishable items and is rolling out DG digital coupon program too. Dollar General’s impressive comparable-store sales performance, also raises optimism.
Why Burlington Stores May Trump Estimates?
Burlington Stores, retailer of branded apparel products, is scheduled to announce first-quarter fiscal 2018 numbers on May 31. The stock has a Zacks Rank #2 and an Earnings ESP of +0.62%. The Zacks Consensus Estimate for the quarter is at $1.09, reflecting an increase of 49.3% year over year. Revenue is expected to come in at $1,496 million, up 11% from the year-ago period.
Burlington Stores has implemented multiple changes to its business model to resonate well with the changes in the industry. Impressively, the company’s current model is helping customers to get nationally branded, fashionable, high quality and fair priced products. Furthermore, it has increased vendor count, made technological advancements, initiated a better marketing approach and focused on localized assortments. Apart from this, in order to drive the top line, Burlington Stores has been concentrating on store expansion. Given the past trends and strategic endeavors, the company is also likely to continue with its positive comps performance in the to-be-reported quarter.
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