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Analyst Blog

Swamped in our daily grind and prevailing problems, we often tend to lose hope on future happiness. The picture is the same in the stock market, where the “China story” -- with its spillover effect on the U.S. economy -- and the Fed’s pending decision over the rate hike have snowballed into a common issue.

It is time you look beyond the woebegone market and lift your spirits. We are into the festive season with Halloween right behind us and Thanksgiving, Black Friday, Cyber Monday and of course Christmas lined up to take you on a holiday shopping spree. So do not let your blood pressure mimic stock market volatility. Instead, start filling your holiday coffers.

Coming to the retail space, competition will be tough, be it at the brick-and-mortar stores or online portals, and retailers need to be hawkeyed to turn rivalry into opportunity. It goes without saying that retailers are gearing up for the season to better serve their patrons. Definitely, the global economic turmoil and the recent financial-market volatility are reasons to worry since these will surely impact consumer behavior but “all’s well that ends well.”

The holiday season is the time when retailers are well on their toes, flooding the markets with offers and promotions. Apart from price-matching policies, retailers will sweep buyers off their feet with early-hour store openings, huge discounts, promotional strategies and free shipping on online purchases. Since the season accounts for a sizeable chunk of yearly revenues and profits, retailers are gung ho to drive footfall.

Does the Sector Hold Promise?

Retailers are efficiently allocating a large chunk of their capital toward a multi-channel growth strategy focused on improving merchandise offerings, developing IT infrastructure to enhance web and mobile experiences of customers, giving their stores a facelift, developing fulfillment centers to enable speedy delivery, implementing an enterprise-wide inventory management system as well as enhancing their relationship with existing and new customers.

Given a rebounding U.S. economy, the retail space is bubbling with optimism. A gradual recovery in the housing market and manufacturing sector, along with an improving labor market and lower gasoline prices, are favoring the economy and playing key roles in raising buyers’ confidence. We expect this positive sentiment to translate into higher consumer spending.

The recently released U.S. GDP data unveiled that the economy grew at a rate of 1.5% in the third quarter, despite a strong dollar and overseas weakness, while consumer spending increased 3.2%. Though the pace of economic growth decelerated from the second quarter due to inventory correction, analysts are hopeful of a pickup in the momentum in the final quarter that primarily constitutes the holiday season.

What Do Holiday Sales Numbers Say?

With the ability and willingness seen in consumers to spend more, retailers could hear their cash registers jingle this time. Data compiled by eMarketer suggests a 5.7% jump in holiday sales (November and December) to $885.7 billion against 3.2% growth projected earlier. Retail E-commerce holiday season sales are anticipated to increase 13.9%, and represent approximately 9% of total sales this season (or $79.4 billion), up from 8.3% last year.

Data compiled by the nation's largest retail trade group, National Retail Federation ("NRF"), projects a 3.7% sales jump for the period to $630.5 billion, shy of 4.1% growth registered last year but better than the 10-year average sales increment of 2.5%. Online sales for the season are expected to increase 6–8% to approximately $105 billion.

Despite global turbulence, sales are expected to increase this holiday season and provide an opportunity to bet on retail stocks that are likely to dominate the festive period.

5 Picks for the Season

We have identified 5 Retail Stocks based on their Favorable Zacks Rank – Zacks Rank #1 (Strong Buy) or #2 (Buy) + expected long-term earnings per share growth rate of 10% or more. A favorable rank indicates positive estimate revisions by analysts who are optimistic on the future performance of a company.

We suggest investing in Darden Restaurants, Inc. (DRI - Free Report) , which sports a Zacks Rank #1 and has a long-term earnings growth rate of 13.3%. The Orlando, FL-based company delivered an average positive earnings surprise of 13.7% over the trailing four quarters. This operator of full-service restaurants is expected to witness earnings growth of 23.4% in fiscal 2016 and 13.5% in fiscal 2017. The Zacks Consensus Estimate has moved up over the past 60 days.

Columbia Sportswear Company (COLM - Free Report) , designer, marketer and distributor of outdoor and active lifestyle apparel, footwear, accessories, is another solid bet, with a Zacks Rank #1. The Portland, OR-based company delivered an average positive earnings surprise of 26.8% over the trailing four quarters, and has a long-term earnings growth rate of 12.5%. The company is expected to witness earnings growth of 15.9% in 2015 and 12.7% in 2016. The Zacks Consensus Estimate too has been trending up over the past 7 days.

Another stock that investors may look forward to is Foot Locker, Inc. (FL - Free Report) , a retailer of athletic shoes and apparel, with a Zacks Rank #1 and a long-term earnings growth rate of 11.5%. The New York-based company delivered an average positive earnings beat of 11.3% over the trailing four quarters. It is expected to witness earnings growth of 18.2% in fiscal 2015 and 11.2% in fiscal 2016. The Zacks Consensus Estimate too has been on the rise over the past 90 days.

Investors can also count on BJ's Restaurants, Inc. (BJRI - Free Report) , operator of casual dining restaurants that carries a Zacks Rank #1 with a long-term earnings growth rate of 20.1%. The Huntington Beach, CA-based company delivered an average positive earnings surprise of 30.6% over the trailing four quarters. The company is expected to witness earnings growth of 61.4% in 2015 and 20.2% in 2016. The Zacks Consensus Estimate too has trended upward over the past 30 days.

Last but not least is Amazon.com, Inc. (AMZN - Free Report) , with a Zacks Rank #2 and a long-term earnings growth rate of 33.5%. This Seattle-based online retailer delivered an average positive earnings surprise of 148% over the trailing four quarters. It is expected to witness massive earnings growth in 2015 and 2016. The Zacks Consensus Estimate too has been on the rise over the past 30 days.

Bottom Line

The holiday season is no less than a battlefield for retailers who fight for consumer attention. Plus, retailers will go the extra mile to trap the bargain hunters. But we wonder whether these will come at the price of margins, not to forget the bottom line.

We believe that retailers should be cautious and diligent this time, given the recent unrest in the global financial market which may affect consumer sentiment and downplay economic growth. Going by the pulse of the economy, we could see more competitive pricing and new products to attract shoppers this holiday season. We expect retail companies to move heaven and earth to win over shoppers. But who wins this race remains to be seen.

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