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Retail Sector Continues to Grow Despite Challenges: 5 Picks

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Inflation rose to its highest level in 41 years, according to data released by the Commerce Department last week. Even then, people continued to spend in March, helping retail sales to grow.

Soaring prices have somewhat slowed down spending but the retail sector hasn’t been impacted much. Rising income and personal spending have been aiding retail revenues. Given this situation, stocks like Target Corporation (TGT - Free Report) , Nordstrom, Inc. (JWN - Free Report) , Chico's FAS(CHS - Free Report) , Costco Wholesale Corporation (COST - Free Report) and Tapestry, Inc. (TPR - Free Report) are likely to benefit in the near term.

Retail Sector Continues to Grow

The Commerce Department said on Apr 14 that retail sales grew 0.5% in March, marginally lower than economists’ expectations of a rise of 0.6%. The rise comes as inflation rose 1.2% for the month, hitting a 41-year high.

Rising commodity prices have been worrying consumers, making them skeptical about spending. Following the COVID-19 outbreak in March 2020, retailers have experienced uneven sales.

However, this year has been good, with the sector growing in the first three months despite rising prices. The jump in March was driven by spending on gasoline, which jumped 8.9%, on an 18.3% surge in its prices.

E-commerce, which has been playing an important role in driving retail sales since the onset of the pandemic, increased 6.4% month over month in March. Sales at general merchandise stores and sporting goods and electronic stores rose 5.4% and 3.3% last month.

Retail Sector on Track for Growth

The retail sector is facing many challenges. Besides rising prices, supply chain crisis has been posing a major threat to retailers. However, the sector has shown major improvement lately despite an unimpressive holiday season that saw sales tanking during the end of 2021.

On a year-over-year basis, retail sales grew 6.9% in March. Also, people have again started spending on services, which saw restaurant sales grow 1% in March.

A separate Mastercard SpendingPulse report also showed retail sales increasing in March, driven by higher spending on services. The report shows that retail sales grew 8.4% on a year-over-year basis in March, while it increased 18% from the pre-pandemic period.

In March, airline travel increased 44.8% year over year, while restaurant sales and hotel bookings increased by 19.1%. This indicates that consumer spending on services is picking up, benefiting the retail sector.

A substantial number of businesses were forced to temporarily close down due to the pandemic. During this period, e-commerce gained popularity, with millions of people shopping online. In-store traffic, on the other hand, began to rebound in mid-2021, following a huge immunization effort that gave people the confidence to leave their houses as shops began to open.

However, during the middle and latter half of last year, two coronavirus variants — Delta and Omicron — led to an increase in new cases. These threatened the economy, and the retail sector faced new challenges. They also had a significant impact on the holiday season last year.

With the turn of the year, things began to change, as new cases of COVID-19 began to decline and the death rate began to drop. As a result, the economy began to function practically fully. Restrictions were gradually relaxed when offices, companies, and schools reopened.

Also, retail sales are getting a boost because of a rise in personal income and spending. Personal income rose 0.5% in February, while spending increased 0.2%.

Our Choices

The retail sector is still facing a number of challenges but its growth hasn’t stagnated, which is a good sign. However, there are quite a few bright sports. Given this scenario, it would be ideal to invest in retail stocks. We have hand-picked four stocks for you. Each of the stocks carries a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Chico's FAS is a cultivator of brands serving the lifestyle needs of fashion-savvy women 30 years and older. CHS’ brand portfolio currently consists of three brands: Chico's, White House Black Market and Soma. Chico's FAS are all specialty retailers of private label women's apparel, accessories and related products.

Chico's FAS’ expected earnings growth rate for the current year is 15%. The Zacks Consensus Estimate for current-year earnings has improved 9.5% over the past 60 days. CHS carries a Zacks Rank #2.

Tapestry, Inc. is the designer and marketer of fine accessories and gifts for women and men in the United States and internationally. TPR offers lifestyle products, which include handbags, women’s and men’s accessories, footwear, jewelry, seasonal apparel collections, sunwear, travel bags, fragrance and watches. 

Tapestry reported stronger-than-expected first-quarter fiscal 2022 earnings, thanks to robust demand and strong customer engagement. TPR posted first-quarter adjusted earnings of 82 cents a share, beating the Zacks Consensus Estimate of 69 cents.

Tapestry’s expected earnings growth rate for the current year is 22.9%. The Zacks Consensus Estimate for current-year earnings has improved 0.6% over the past 60 days. TPR has a Zacks Rank #2.

Target Corporation has evolved from being a pure brick & mortar retailer to an omni-channel entity. TGT has been investing in technologies, improving websites and mobile apps, and modernizing the supply chain to keep pace with the changing retail landscape and better compete with pure e-commerce players. Target Corporation’sacquisition of Shipt to provide same-day delivery of groceries, essentials, home, electronics as well as other products is worth noting.

Target Corporation’s expected earnings growth rate for the current year is 6.7%. The Zacks Consensus Estimate for current-year earnings has improved 9.6% over the past 60 days. TGT carries a Zacks Rank #2.

Costco Wholesale Corporation sells high volumes of food and general merchandise (including household products and appliances) at discounted prices through membership warehouses. Costco is one of the largest warehouse club operators in the United States. COST also operates e-commerce websites in the United States, Canada, the United Kingdom, Mexico, Korea, Taiwan, Japan and Australia.

Costco Wholesale Corporation’s expected earnings growth rate for the current year is 17.4%. The Zacks Consensus Estimate for current-year earnings improved 2.7% over the past 60 days. COST has a Zacks Rank #2.

Nordstrom, Inc. is a leading fashion specialty retailer in the United States. JWN offers an extensive selection of both branded and private-label merchandise, which are positioned in the upscale segment of the industry. Nordstrom offers high-quality apparel, shoes, cosmetics and related accessories for men, women, young adults and children through a variety of channels.

Nordstrom’s expected earnings growth rate for the current year is more than 100%. The Zacks Consensus Estimate for current-year earnings has improved 61.8% over the past 60 days. JWN sports a Zacks Rank #1.