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American Consumers Perk Up the Retail Scene: 5 Solid Buys

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Retailers, led by Walmart Inc. (WMT - Free Report) , have reported strong sales in Q2. This reflects an encouraging economic scenario which is allowing Americans to splurge and that some have found ways to compete in an ever growing e-commerce world.

Americans are pretty confident about their personal income and employment, while Republican tax cuts are adding to their incomes. Such aspects not only drove sales last month but also compelled retailers to raise their expectations for the year. Given the positives, investing in sound retail stocks seems prudent.

Walmart Posts Best Sales in a Decade, Adopts to Change

Everyone for quite some time has been talking about a retail apocalypse. Walmart, once the undisputed king of American consumerism, took a back seat to Amazon.com, Inc.’s (AMZN - Free Report) online business that completely changed the retail scenario in the last decade. This, in turn, compelled brick-and-mortar stores to either adapt to the change or perish.

Walmart’s recent stellar quarterly earnings, however, restored faith in brick-and-mortars. The retailer’s fiscal second-quarter earnings and sales beat expectations and notched the best comparable sales growth in the last 10 years. Sales were robust, particularly, in grocery, apparel, and seasonal merchandise departments, while its e-commerce sales ticked higher. The predominantly brick-and-mortar giant has also ventured into the digital space and its new strategy to redesign website and expand online groceries are paying off well.

Not just Walmart, Nordstrom, Inc. (JWN - Free Report) , The Home Depot, Inc. (HD - Free Report) and coach owner Tapestry, Inc. (TPR - Free Report) have also benefitted as shoppers showed more confidence translating to rising sales.

Consumer Spending Lifts Retailers

Walmart Chief Executive Doug McMillon said that “customers tell us that they feel better about the current health of the U.S. economy as well as their personal finances.” Thus, buoyed by an uptick in income and employment as well as recent tax cuts, Americans have started to splurge more on retail products, including jeans, handbags and wall paint.

July retail sales, in fact, were fairly robust. Sales at U.S. retailers rose 0.5% last month, while it increased 6.4% over the past 12 months and was close to the long-run average since 1980. By the way, the National Retail Federation (NRF) said that it expects retail sales to climb higher than what had been earlier projected. Spending at retailers for this year — excluding automobiles, gasoline stations and restaurants — is predicted to grow 4.5% year over year. The trade organization had projected a modest growth range of 3.8% to 4.4% in February.

NRF asserted that for the first half of this year, retail sales improved 4.8% over the same period last year in spite of a poor show in January. In the most recent three-month moving average, retail sales ticked up 4.4% year over year (read more: US Retail Sales Expectations for 2018 Up By a Notch: 5 Picks).

Catalysts Boosting Spending

Disposable personal income increased $167.5 billion, or 4.5%, in the second quarter, which followed a gain of $256.7 billion or 7% in the first quarter. The U.S. economy, in the meantime, added 157,000 new jobs in July and has risen for 94 successive months, the longest streak on record. At the same time, the jobless rate dropped to 3.9%. This is the eighth time that the unemployment rate has fallen below the 4% mark since 1970. The current unemployment rate is now at a nearly two-decade low (read more: 5 Stocks to Buy on a Historic Job Growth Streak).

To top it, the cut in taxes increased take-home pay. This gave Americans the means to spend more. The “Tax Cuts and Jobs Act” constricted the individual income tax brackets. While the top rate got trimmed from 39.6% to 37%, the 33% bracket declined to 32%, the 28% bracket to 24%, the 25% bracket to 22%, and the 15% bracket to 12%.

5 Top Picks

Taking the spending spree into account, retailers are set to witness a strong rally. Hence, it will be wise to invest in these five solid retail stocks. These stocks also have a Zacks Rank #1 (Strong Buy) or 2 (Buy).

Urban Outfitters, Inc. (URBN - Free Report) engages in the retail and wholesale of general consumer products. Currently, the company has a Zacks Rank #2. In the last 60 days, one earnings estimate moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings rose 0.4% in the same period. The company’s projected growth rate for the current year is 49.7%, while the Retail - Apparel and Shoes industry is expected to rise 14.7%.

Boot Barn Holdings, Inc. (BOOT - Free Report) operates specialty retail stores in the United States. The company currently has a Zacks Rank #1. In the last 60 days, six earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings rose 12.7% in the same period. The company’s projected growth rate for the current year is 64.3%, while the Retail - Apparel and Shoes industry is expected to grow 14.7%.

Kohl's Corporation (KSS - Free Report) operates as an omni-channel retailer in the United States. Currently, the company has a Zacks Rank #2. In the last 60 days, four earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings rose 0.4% in the same period. The company’s projected growth rate for the current year is 28.9%, while the Retail - Regional Department Stores industry is expected to increase 22.3%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Dollar General Corporation (DG - Free Report) provides various merchandise products in the southern, southwestern, Midwestern, and eastern United States. Currently, the company has a Zacks Rank #2. In the last 60 days, two earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings rose 0.2% in the same period. The company’s projected growth rate for the current year is almost 35%, while the Retail - Discount Stores industry is expected to rise 18.3%.

RH (RH - Free Report) operates as a retailer in the home furnishings. Currently, the company has a Zacks Rank #2. In the last 60 days, five earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings rose 1.8% in the same period. The company’s projected growth rate for the current year is 118.4%, while the Retail - Home Furnishings industry is expected to grow 22%.

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