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Retail Recovery Raises Hopes for Back-to-School Season: 5 Stocks to Buy

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Retailers have a renewed view for the year ahead, having closed the first quarter of 2021 on a positive note. The companies witnessed a strong rebound in sales for the first quarter as the lifting of restrictions, vaccination rollouts and government stimulus packages led to increased consumer demand. Consumers are now venturing out to stores for their purchases, while e-commerce continues to retain momentum. This has led to strong traffic trends in stores as well as online portals.

Encouraged by the strong start to the year, retailers are now looking forward to the back-to-school and back-to-college season sales, as children are excited to return to their all-day-long school and college classrooms. The event coincides with adults now ready to go back to offices. Leaving behind the unique back-to-school season of last year, retailers are now expecting to return to normality as the COVID-19 outbreak wanes in the United States and consumer preference changes in a reopening economy.

Retailers, particularly apparel, are expecting to make the most of the recovery in demand, making up for the sales lost last year as schools, colleges and offices remained closed due to the pandemic. The companies anticipate increased demand for clothes as consumers return to normal activities like celebrations, parties, holidays, reunite with colleagues or classmates, attend weddings and gear up for life events. Additionally, department stores, discount stores and online retailers are likely to grab a share of the raised shopping spirits of consumers in the back-to-school season.

Traditionally, the back-to-school season in the United States falls when children return to school after the summer breaks. The period between mid-July to early September is usually a major sales event for retailers as families plan out spending on school and college supplies, and clothing. This year’s back-to-school period becomes more crucial as it marks a beginning in the post-COVID environment. The excitement is doubled as students prepare for their in-person schooling and adults get ready for “return to office”, overcoming the chaos experienced in 2020.

Many retail companies have given optimistic views for the upcoming back-to-school season, anticipating strong sales for the second quarter. Further, the companies are predicting sales for the back-to-school season to outpace the pre-pandemic levels, owing to strong pent-up demand. This, in turn, is likely to translate to strong sales and earnings numbers for the year.

The optimism regarding the recovery in retail trends is further supported by the National Retail Federation’s (NRF) revised retail sales prediction for 2021, which excludes sales for automobiles, gas stations and restaurants. However, it includes both store and e-commerce sales. The NRF predicts retail sales increase of 10.5-13.5% to $4.44-$4.56 trillion for 2021. Earlier, the retail trade group forecast retail sales growth of 6.5-8.2% to more than $4.33 trillion for the year.

MasterCard’s Back-to-School Sales Forecast

MasterCard SpendingPulse forecasts back-to-school sales in the United States to increase 6.7% from the 2019 levels and 5.5% from the 2020 levels when the COVID-19 outbreak was at its peak. Further, Mastercard suggests a sharp year-over-year rise in apparel sales as consumers replenish their closets with fresh and fashionable attire. It expects apparel sales to increase 78.2% from the back-to-school period of 2020 and about 11.3% from the period in 2019.

Additionally, the forecast indicates strong sales growth for department store retailers, as these have been the go-to places for consumers during the back-to-school shopping season. As consumers return to malls and walk through the store aisles again, sales for department stores are expected to rise 25.3% year over year, per MasterCard. Additionally, back-to-school sales for department stores are likely to increase 9.5% from the 2019 period. Rebound in footfall, buy online pick up in stores and other technology-driven contactless options will continue to drive sales trends for the department stores in this period.

Additionally, MasterCard anticipates continued strong demand for electronics for the period, owing to the virtual classes set up last year. Sales for electronics are expected to increase 13% year over year and 9.6% from the 2019 period.

Despite consumers returning to stores, MasterCard expects online shopping habits to continue to be high. It predicts e-commerce sales growth of 53% from the back-to-school season of 2019. However, online sales trends are expected to be moderate compared with the 2020 period as the closure of stores led to the heightened demand for e-commerce in the prior year. MasterCard predicts a 7% year-over-year decline in back-to-school e-commerce sales.

While the back-to-school promotions are yet to start, companies like Amazon (AMZN - Free Report) , Walmart (WMT - Free Report) and Target have rolled out their summer sales events, which will mark the early start of back-to-school sales. The Amazon Prime Day is scheduled for Jun 21 and Jun 22. Also, Walmart and Target’s already-announced sales events coincide with this period.

MasterCard noted that the anticipated momentum for the back-to-school season suggests the continuation of the current retail sales momentum. It stated that retail sales for May increased 12.2% year over year and 10.2% from May 2019. This marked the eighth straight month of retail sales growth. Online sales in May jumped 1.1% year over year and 94.8% from May 2019.

Our Picks

The ongoing momentum in retail clearly indicates that it is prudent to invest in the sector at this time. Here we have highlighted five Zacks Retail-Wholesale stocks with a favorable combination of a VGM Score of "A" or "B" and a Zacks Rank #1 (Strong Buy) or #2 (Buy). The stocks are backed by sound fundamentals, surging share price and a track record of better-than-expected results. Notably, each of the stocks have outperformed the S&P 500 composite’s growth of 13.1% on a year-to-date basis.

Per the Zacks proprietary methodology, stocks with such a perfect mix of elements offer solid investment opportunities.

Zacks Investment ResearchImage Source: Zacks Investment Research

Dillard’s Inc. (DDS - Free Report) , a large departmental store chain, featuring fashion apparel and home furnishings, is a solid bet now. The company, with a Zacks Rank #1 and a long-term earnings growth rate of 24.3%, has a trailing four-quarter earnings surprise of 206.3%, on average. Moreover, the Zacks Consensus Estimate for its current-year earnings has improved by a substantial 542.3% in the past 30 days. Dillard’s has a VGM Score of A and has rallied 164.2% year to date. You can see the complete list of today’s Zacks #1 Rank stocks here.

Investors may also count on one of the leading global lifestyle retailers, Zumiez Inc. (ZUMZ - Free Report) . The company currently sports a Zacks Rank #1 and has a VGM Score of B. It delivered an earnings surprise of 2,613%, on average, in the trailing four quarters. The consensus mark for current-year earnings has moved north by 26% in the past seven days. The stock has risen 26.3% year to date.

We also suggest investing in L Brands, Inc. (LB - Free Report) , which has rallied 76.2% year to date. The Columbus, OH-based apparel retailer has delivered an earnings surprise of 489.6%, on average, in the trailing four quarters. The consensus mark for its current-year earnings has moved up by 25.9% in the past 30 days. The Zacks Rank #2 company has a long-term earnings growth rate of 13%. It has a VGM Score of A.

Another lucrative option is Menomonee Falls, WI-based Kohl’s Corporation (KSS - Free Report) . The company is a U.S.-based department store chain, which operates specialty department stores and an e-commerce site. It currently has a VGM Score of A and a Zacks Rank #2. The company delivered an earnings surprise of 96.2%, on average, in the trailing four quarters. The consensus mark for current-year earnings has increased 27.4% in the past 30 days. Moreover, the company has a long-term expected earnings growth rate of 8%. The stock has rallied 32.2% year to date.

Sally Beauty Holdings, Inc. (SBH - Free Report) is an international specialty retailer and distributor of professional beauty supplies. The company delivered an earnings surprise of 37.8%, on average, in the trailing four quarters. The consensus mark for current-year earnings has improved 3.2% in the past seven days. Moreover, the stock has gained 54.6% year to date. The company has a VGM Score of B and it currently sports a Zacks Rank #1.

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