Back to top

Image: Bigstock

Consumer Confidence Soars: 5 Retail Stocks Poised to Benefit

Read MoreHide Full Article

Consumers, who are at the forefront of all economic activity, have been in the spotlight lately due to a positive economic backdrop with the stock markets surging, wages improving gradually, unemployment rate at a 17-year low, home prices rising and inflation remains modest. These were the main driving factors that led retailers to enjoy a heartening holiday season in a long time.

In fact, people continued to shop without hesitation this holiday season due to less fears about the future. This is well reflected in the 0.4% or $54.2 billion increase in consumer spending recorded in December, following a gain of 0.8% in November. Further, recent reports indicate that the optimism that built during the final months of 2017 has carried into January as consumers are no longer wary of shopping and the economy is taking the road uphill.

These positives further led to a rebound in consumer confidence, which gauges the consumers’ optimism on the economy expressed through savings and spending patterns. Per the Conference Board, Consumer Confidence Index showed a marked improvement in January, after witnessing a setback in December. Consumer Confidence rose 2.3 points to 125.4 in January, following a decline to 122.1 in December. Notably, the index rose to 129.5 in November, which was the highest mark since the increase to 132.6 recorded in November 2000.

The primary reason for the surge in the index is consumers’ belief that the pace of growth witnessed in the latter half of 2017 will continue in 2018. This has led consumers to use their savings to make purchases. This surely is a welcome sign for retailers, who are end-beneficiaries of the rising consumer spending and confidence.

How the Retail Sector Stands to Gain from Consumers’ Prosperity?

The link between consumers and the Retail-Wholesale sector becomes more relevant as retail sales attract approximately 30% of total consumer spending in the United States. This clears the air to a large extent, explaining that the prosperity of the retail segment is greatly dependent on consumers and their propensity to spend.

A clear example of this is the strong holiday season witnessed in 2017. As stated earlier, the success of the holiday season was mostly due to the rise in consumer spending in the final months of 2017. This directly reflected in the rise in retail sales during the months of November and December, which marks the holiday sale period for retailers.

Per National Retail Federation (“NRF”) retail sales during November/December increased 5.5% to $691.9 billion. Additionally, on a stand-alone basis, U.S. retail and food services sales in December rose 0.4% from November and 5.4% from Dec 2016 to $495.4 billion, as per the Commerce Department. This followed growth of 0.9% recorded in November 2017.

This has lifted the overall outlook of the retail sector. Further, the growing consumer confidence supported by a stable economy suggests that the sector is well poised to witness a strong 2018. Evidently, the sector, which currently occupies the top 13% (2 out of 16) position in the list of 16 Zacks categorized sectors, has advanced 43% in the past year and significantly outperforming the S&P 500’s  growth of 25.9%.



5 Enticing Retail Picks

We used the Zacks methodology to narrow down upon retail stocks that not only boast solid fundamentals but are also poised to beat earnings estimates this earnings season. 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.

First on the list is American Eagle Outfitters Inc. (AEO - Free Report) , a specialty retailer of casual apparel, accessories and footwear for men and women. The company has delivered an average earnings surprise of 2.6% in the trailing four quarters. Moreover, the company’s long-term expected earnings growth rate of 5.5% and VGM Score of A, show potential. The Zacks Consensus Estimate for the quarter is pegged at 44 cents per share. The company has an Earnings ESP of +0.07% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Investors may also consider Hibbett Sports Inc. (HIBB - Free Report) , a sporting goods retailer in small to mid-sized markets in the South, Southwest, Mid-Atlantic and lower Midwest regions of the United States. The company has delivered positive earnings surprises in the trailing four quarters, with an average beat of 25.6%. Moreover, we expect it to beat earnings in the current quarter as it has an Earnings ESP of 3.01% and a Zacks Rank #1. The Zacks Consensus Estimate for the quarter is 29 cents per share. It also has a VGM Score of A.

Aaron’s Inc. (AAN - Free Report) , an omni-channel provider of lease-purchase solutions, is also a solid bet. The company has delivered an average positive earnings surprise of 7.3% in the trailing four quarters. The Zacks Consensus Estimate for the current quarter is pegged at 54 cents per share. The company has an Earnings ESP of +1.05% and a Zacks Rank #2, which raises hopes of a beat in the current quarter. Further, its VGM Score of A drives optimism.

Another lucrative option is Cincinnati, OH-based Macy’s Inc. (M - Free Report) with a Zacks Rank #2 and an Earnings ESP of +1.29%. This leading department store retailer has a long-term earnings growth rate of 8.5%. The company has delivered positive earnings surprises in the last two quarters. The Zacks Consensus Estimate for the current quarter of $2.66 per share has witnessed uptrend in the last 30 days.

Last but not the least, investors may consider Lowe’s Companies Inc. (LOW - Free Report) , a leading home improvement retailer with operations primarily in the United States, Canada and Mexico. It currently carries a VGM Score of B and a long-term earnings growth rate of 16.2%. The company has delivered positive earnings surprises with an average beat of 1.2% in the trailing four quarters. The Zacks Consensus Estimate for the current quarter is pegged at 88 cents per share. The company has an Earnings ESP of +2.15% and a Zacks Rank #3.

The Hottest Tech Mega-Trend of All

Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce ""the world's first trillionaires,"" but that should still leave plenty of money for regular investors who make the right trades early.

See Zacks' 3 Best Stocks to Play This Trend >>

Published in