As investors eagerly await the upcoming earnings releases, the performance of key players within the Retail-Wholesale sector holds the potential to significantly influence market sentiment in the weeks ahead. This reporting cycle offers a peek into the sector's performance, indicating a likely uptick in both sales and earnings. These outcomes are expected to be shaped by prevailing consumer sentiments, spending trends and the ongoing challenge of input costs.

Key Influencing Factors

The industry's prospects are closely tied to consumer purchasing power. Consumer spending, a crucial driver of economic activity, has exhibited resilience, supported by a robust labor market and wage growth. With concerns about an imminent recession taking a backseat, consumer confidence has seen a resurgence. This renewed optimism is underscored by the addition of 353,000 jobs to the U.S. economy in January 2024, surpassing December 2023's revised figure of 333,000.

Traditionally, the fourth-quarter reporting cycle includes the U.S. holiday season, which accounts for a sizable chunk of yearly revenues for retailers. Data released by the National Retail Federation (“NRF”) reveals a noteworthy 3.8% surge in sales, reaching a record-breaking $964.4 billion. This impressive performance aligns seamlessly with the NRF’s forecast, indicating a rise between 3% and 4%.

No doubt, inflation and a higher interest rate environment have been subjects of concern across various sectors, including retail. Rising cost pressure, wage increases and higher promotional activities have put margins in the spotlight. This has spurred retailers into action, who are re-engaging with their customer base, recalibrating pricing strategies, refreshing product assortments and identifying opportunities to curtail costs.

Also, companies have been undertaking a more consumer-centric approach — emphasizing membership programs, store technology upgrades, shopping via the mobile app and last-mile delivery solutions. Expedited delivery services like doorstep delivery, curbside pickup or buy online and pick up at store, as well as contactless payment solutions, have been aiding in maximizing the share of customers’ wallets.

Per the latest Zacks Earnings Preview, the sector is anticipated to have witnessed top-line growth of 6.3% year over year in the fourth quarter of 2023. This follows a 5.9% increase in the preceding season. Meanwhile, the bottom line is expected to have increased 27.8% this earnings season. The sector registered earnings growth of 25.2% in the previous reporting cycle.

Making the Perfect Choice

With the earnings season in full swing, it is worthwhile to invest in companies with earnings beat potential. A stock generally rallies on an earnings beat.

Our research shows that for stocks with the combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold), the chance of a positive earnings surprise is as high as 70%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

We have identified four stocks — American Eagle Outfitters, Inc. (AEO Quick QuoteAEO - Free Report) , Costco Wholesale Corporation (COST Quick QuoteCOST - Free Report) , Walmart Inc. (WMT Quick QuoteWMT - Free Report) , and Burlington Stores, Inc. (BURL Quick QuoteBURL - Free Report) — that are poised to trump earnings estimates this season.

4 Prominent Picks

Investors can count on American Eagle Outfitters with a Zacks Rank #1 and an Earnings ESP of +0.87%. The Zacks Consensus Estimate for fourth-quarter fiscal 2023 earnings per share has risen by a couple of cents to 50 cents in the past 30 days. The consensus estimate suggests an increase of 35.1% from the year-ago period. AEO has a trailing four-quarter earnings surprise of 23%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

American Eagle’s efforts to rationalize inventory and contain costs are paying off. The strong performance of key brands like American Eagle and Aerie, coupled with expansions into premium and activewear segments, indicates potential for growth. The introduction of store designs and online enhancements demonstrates a commitment to improving the customer experience.

Costco also deserves a mention. The stock has a Zacks Rank #2 and an Earnings ESP of +1.50%. The Zacks Consensus Estimate for second-quarter fiscal 2024 earnings per share has risen by 0.8% to $3.59 in the past seven days. The consensus estimate implies an increase of 8.8% from the year-ago period. Costco has a trailing four-quarter earnings surprise of 2.6%, on average.

The discount retailer’s growth strategies, better price management and decent membership trends have been contributing to its performance. Cumulatively, these factors have been aiding this Issaquah, WA-based company in registering decent sales numbers. The company's distinctive membership business model and pricing power set it apart from traditional players. We believe a favorable product mix, steady store traffic, pricing strength and strong liquidity should benefit Costco, which is scheduled to report financial numbers on Mar 7 after market close.

You may consider Walmart, which has a Zacks Rank #3 and an Earnings ESP of +1.70%. Over the past 30 days, the Zacks Consensus Estimate for fourth-quarter fiscal 2024 earnings per share has been stable at $1.63, suggesting a decline of 4.7% from the year-ago quarter. The omnichannel retail giant has a trailing four-quarter earnings surprise of 8.2%, on average.

Walmart has been working diligently to further strengthen its already formidable presence in the market. The company has embarked on a series of strategic e-commerce initiatives, encompassing acquisitions, partnerships and significant improvements in its delivery and payment systems. Simultaneously, Walmart is committed to elevating its merchandise offerings, thus ensuring a diverse and appealing product assortment. The company is slated to report financial numbers on Feb 20 before market open.

Burlington Stores, with a Zacks Rank #3 and an Earnings ESP of +1.35%, is worth betting on. Over the past 30 days, the Zacks Consensus Estimate for fourth-quarter fiscal 2023 earnings per share has been stable at $3.24, suggesting an increase of 9.5% from the year-ago quarter. This nationally recognized off-price retailer of high-quality, branded apparel, footwear, accessories and merchandise has a trailing four-quarter earnings surprise of 9.4%, on average.

Burlington Stores is strategically positioning itself for substantial growth and improved profitability. The company is set to significantly enhance its operational efficiency and expand its market presence through strategic supply-chain management, the focused implementation of its off-price retail model as part of the Burlington 2.0 initiative and an aggressive store expansion plan. These initiatives are expected to propel Burlington Stores toward notable increases in both sales and operating margins.