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3 Retail Stocks to Bank On

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The health of the retail industry largely depends upon consumer confidence and spending patterns. Of late, the U.S as well as some international markets have been witnessing a challenging retail/sales environment as consumers are now increasingly conscious about their spending habits and avoid any unnecessary expenses. The restrained consumer spending environment in the U.S. emanated from the recent hike in payroll taxes and higher gas prices. Lower and middle income consumers have had to bear the brunt of higher payroll taxes, which increased 2 percentage points since Jan 2013. Besides taxes, weak pay and a tepid rate of hiring have also curbed consumer spending, which led to lackluster sales.

The trend has weakened sales and profits of big-box retailers like Macy’s Inc (M - Free Report) , Kohl’s Corporation (KSS - Free Report) and Wal-Mart Stores, Inc (WMT - Free Report) , all of which reported soft results in the last two days. On Aug 14, Macy’s trimmed its comparable sales and earnings outlook after posting lower-than-expected second-quarter fiscal 2013 results due to the cautious approach of consumers toward discretionary purchases. Yesterday, Kohl's also reported soft sales owing to a challenging retail environment. Though Kohl’s earnings were decent due to tight expense control, the improvement was minimal.

The biggest blow was when the economic bellwether Walmart reported weak fiscal second quarter 2014 results. This was on top of sluggish results announced in the first quarter. The world’s largest retail giant sharply lowered its sales and earnings guidance for fiscal year. The retail giant expects the gloomy consumer spending environment to continue globally. The economic strains in the U.S. and abroad are likely to pressurize its low-income shoppers for the rest of the year.

While these departmental store chains are suffering due to lower consumer spending, there are a few other retail stocks that are doing well amid the challenging retail environment. A recovery in the housing market, strong marketing programs and several other strategic/restructuring/growth initiatives are helping these companies to stand in the market.

Three Stocks That Can Enrich Your Portfolio

Here are three Zacks Rank #1 (Strong Buy) retail stocks with above-average earnings growth that you can add to your portfolio.

We suggest investing in Haverty Furniture Cos. Inc. (HVT - Free Report) , which is a full-service home furnishings retailer. On Jul 31, Haverty posted better-than-expected earnings on the back of housing market recovery. The company’s initiatives to improve store productivity and operational efficiency have been the key to its success. The company’s marketing strategies have also been increasing store traffic. Though the stock looks a bit pricey with a P/E (price-to-earnings) multiple of 25.18x, it should not thwart investors given the company’s strong fundamentals.

Another stock that investors may look forward to is hhgregg, Inc. . Shares of this appliance and electronic retailer have amassed a year-to-date return of roughly 140%. The company recently reported solid first quarter results. Company sales surpassed expectations and also grew year over year as initiatives to improve its sales mix, expand customer base and enhance its service offerings paid off. These initiatives have pulled the company out from the continued weakness in the video category. hhgregg has also been growing its business with the introduction of new products in the furniture and fitness categories. The company also expanded its computing and mobile phones category to drive additional traffic and increase sales. The company is expected to witness earnings growth of 19.4% in fiscal 2014, higher than its peer group earnings growth of 16.6%.

Coffee retailer Green Mountain Coffee Roasters Inc. is another stock to bet on. We remain impressed with the company’s strong momentum in its Keurig business, which also helped the company raise its earnings outlook for fiscal 2013. Other than the Keurig business, the company’s continuous efforts to increase brand investments and product innovations are also contributing to earnings growth.

Green Mountain currently trades at a forward P/E of 23.55x, higher than its peer group P/E average of 19.18x. However, the stock has upside potential and an impressive long-term expected earnings growth rate of 19.5% versus 17.2% for the peer group.

We believe that these stocks with strong fundamentals and growth prospects are capable of offering investors solid returns.

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