The retail sector is trying to stage a solid recovery amid existing inflationary pressures. However, retail sales declined marginally in October, the first time in seven months. Even then, the retail sector has immense potential, and with inflation declining steadily and the holiday season approaching, the sector is poised to do well.

Given this situation, stocks like American Eagle Outfitters, Inc. (AEO Quick QuoteAEO - Free Report) , Amazon.com, Inc. (AMZN Quick QuoteAMZN - Free Report) , Deckers Outdoor Corporation (DECK Quick QuoteDECK - Free Report) , Walmart, Inc. (WMT Quick QuoteWMT - Free Report) and Tripadvisor, Inc. (TRIP Quick QuoteTRIP - Free Report) are expected to benefit in the near term.

Retail Sector Fighting Back

The Commerce Department said on Nov 15 that retail sales declined marginally by 0.1% in October. However, the reading came in a lot better than economists’ forecast of a decline of 0.3%.

October’s decline follows a 0.9% jump in retail sales in September. Moreover, retail sales have declined for the first time since March.

Higher demand fueled by robust spending had been driving retail sales. However, personal spending slowed in October, which hampered retail sales.

Despite the decline, consumers spent aggressively at restaurants and supermarkets, with sales rising 0.3% and 0.7% in October, respectively.

Retailers are now looking forward to the upcoming holiday season, which is one of the year’s most important shopping windows. Although sales declined marginally in October, holiday sales are projected to grow this year, too.

According to the National Retail Federation, holiday sales are projected to jump 3-4% to $957.3-$966.6 billion this year.

The NRF projects that sales from online and other non-store channels will increase by 7% to 9%, totaling $273.7 billion to $278.8 billion.

U.S. third-quarter GDP rose a solid 4.9%, more than double the increase in the second quarter, reflecting the underlying strength in the economy.

Inflation, too, has been declining sharply. The Consumer Price Index (CPI) rose 3.2% year over year in October, declining from September’s rise of 3.7%. Core CPI, which excludes energy and food prices, increased 4% year over year in October. Month over month, Core CPI increased 0.4%.

Also, the Fed kept interest rates unchanged in its last two FOMC meetings to the current range of 5.25-5.5%. This has raised expectations that the Fed might soon end its monetary tightening cycle. This bodes well for the retail sector. 

Our Choices

Given this scenario, retail stocks are expected to benefit in the near term. We've identified five retail stocks that exhibit a Zacks Rank of #1 (Strong Buy) or 2 (Buy).You can see the complete list of today’s Zacks #1 Rank stocks here.

American Eagle Outfitters, Inc. is a specialty retailer of casual apparel, accessories and footwear for men and women aged 15-25 years. AEO, along with its subsidiaries, engages in the designing and marketing of casual clothing. American Eagle Outfitters’ assortment includes jeans, cargo pants, graphic T-shirts, and a range of accessories, outerwear and footwear.

American Eagle Outfitters’ expected earnings growth rate for the current year is 36.1%. The Zacks Consensus Estimate for current-year earnings has improved 4.8% over the past 60 days. AEO presently sports a Zacks Rank #1.

Amazon.com, Inc. is one of the largest e-commerce providers, with sprawling operations in North America and across the globe. AMZN’s online retail business revolves around the Prime program, well supported by the company’s massive distribution network. Further, the Whole Foods Market acquisition helped Amazon establish its footprint in the physical grocery supermarket space.

Amazon.com’sexpected earnings growth rate for the current year is 276.1%. The Zacks Consensus Estimate for current-year earnings has improved 19.7% over the past 60 days. AMZN presently carries a Zacks Rank #2.

Deckers Outdoor Corporation is a leading designer, producer and brand manager of innovative, niche footwear and accessories developed for outdoor sports and other lifestyle-related activities. DECK sells products primarily under five proprietary brands — UGG, HOKA, Teva, Sanuk and Other brands (mainly comprising Koolaburra).

Deckers Outdoor’sexpected earnings growth rate for the current year is 20.8%. The Zacks Consensus Estimate for current-year earnings has improved 4.5% over the past 60 days. DECK currently has a Zacks Rank #2.

Walmart has evolved from just being a traditional brick-and-mortar retailer into an omnichannel player. WMT’s product offerings include almost everything from grocery to cosmetics, electronics to stationery, home furnishings to health and wellness products, and apparel to entertainment products, to name a few.

Walmart’s expected earnings growth rate for the current year is 2.7%. The Zacks Consensus Estimate for current-year earnings has improved 0.5% over the past 60 days. WMT presently carries a Zacks Rank #2.

Tripadvisor, Inc. is one of the largest online travel research companies in the world. It provides a platform for users to share reviews, ratings and opinions on hotels, destinations, attractions and restaurants. TRIP also facilitates bookings between hotel suppliers and consumers using its web portals.

Tripadvisor’s expected earnings growth rate for the current year is 48%. The Zacks Consensus Estimate for current-year earnings has improved 5.7% over the past 60 days. TRIP currently has a Zacks Rank #2.