Consumer spending increased for the third straight month in June as households spent more freely on goods and services. In fact, spending from April to June showed the biggest quarterly gain since the seven-year old recovery started in mid-2009.

Wage growth and low inflation propelled household spending during the said period, which eventually boosted sales at retail outlets. With improvement in income levels, consumers are expected to spend more, which is more than welcome news for the retailers. Given this optimism, investing in retail stocks makes perfect sense now.

Solid Rise in Consumer Spending in Q2

According to the Commerce Department, personal consumption expenditure that measures how much Americans spent on everything from haircuts to cars rose 0.4% in June from a month earlier. The increase in outlays in June came in ahead of the consensus estimate of a rise by 0.3%. When adjusted for inflation, consumer spending rose 0.3%.

Spending was already on a solid track, with outlays gaining 0.4% in May and 1% in April. Impressive consumer household spending was the lone bright spot in an otherwise disappointing second quarter. The U.S. economy expanded at an annualized rate of 1.2% in the second quarter, lower than the consensus estimate of 2.6% growth, according to the “advance” estimate by the Bureau of Economic Analysis (read: Struggling U.S. Economy Propped Up by Consumer-Spending Gain).

Nonetheless, purchases expanded beyond broad ticket items, such as, cars and houses, a good sign for the economy. Consumer spending in fact accounts for almost 70% of economic activity.

What Drove Spending Up?

The U.S. economy created a total of 287,000 jobs in June, significantly higher than the consensus estimate of 177,000, according to the Bureau of Labor Statistics. The economy added higher-than-expected new jobs for the first time in the last four months. Further, average hourly earnings gained 0.1% or 2 cents in June from May to $25.61 per hour.

As for inflation, the Fed continuously maintains that it lags its desired target range. Even though some may argue that the core Consumer Price Index went up 2.3%, the Fed's preferred inflation gauge, the Personal Consumption Expenditure Index, remained below its 2% target. The index recorded current inflation at 1.6%, which has continued to hover below the target since 2012 (read: Fed’s Favorite Inflation Measure Remains Stuck at 1.6%).

Retailers Splurge on Growth Trends

U.S. retail sales recorded a healthy gain in June as buyers loosened their purse strings, a telltale sign of sturdy consumer spending.According to the Commerce Department, sales at retail stores and restaurants advanced 0.6% in June after a 0.2% climb in May to a seasonally adjusted $456.98 billion (read: U.S. Retail Sales Jumped as Buyers Flexed Their Muscles).

Sales at retailers had touched the highest level in April in more than a year. This came as a welcome relief, especially after a string of discouraging results from department stores in the first quarter that raised questions about the financial health of consumers (read: 5 Retail Picks to Add to Your Cart as April Sales Shoot Up).

Top 4 Retail Stocks Bolstered By Gain in Spending

Thanks to robust consumer spending levels in the second quarter, retail sales gained traction.  The rule of the thumb is that retail sales attract more or less 30% of total consumer spending in the U.S. The National Retail Federation (NRF) sees U.S. retail sales increasing 3.4% for this year versus a prior forecast of 3.1%. As the shift to e-commerce gains momentum, the NRF also raised its forecast for online sales increase to 7% to 10% this year, slightly higher than its prior expectations.

A steady rise in income levels is also expected to lift consumer spending, which will eventually boost retail sales in the future. Disposable personal income, the portion of personal income that is left after personal taxes are subtracted, increased 0.2% in June. An upbeat labor market and low inflation will ensure that spending levels will remain strong near term.

Hence, we have selected four retail stocks that will benefit from this uptick in spending levels. Such stocks boast a Zacks Rank #1 (Strong Buy) or #2 (Buy).We have also narrowed down our search with a VGM score of ‘A’ or ‘B.’ Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners.

Dave & Buster's Entertainment, Inc. (PLAY Quick QuotePLAY - Free Report) owns and operates entertainment and dining venues for adults and families in North America. PLAY has a Zacks Rank #1 and a VGM score of ‘B’. The company’s estimated earnings growth rate for this year is 27.6%.

The Children's Place, Inc. (PLCE Quick QuotePLCE - Free Report) operates as a children's specialty apparel retailer. PLCE has a Zacks Rank #1 and a VGM score of ‘A’. The company’s estimated earnings growth rate for this year is 17.2%.

Marinemax Inc. (HZO Quick QuoteHZO - Free Report) operates as a recreational boat retailer in the United States. HZO has a Zacks Rank #2 and a VGM score of ‘B’. The company’s estimated earnings growth rate for this year is 17.4%.

Boot Barn Holdings, Inc. (BOOT Quick QuoteBOOT - Free Report) is a lifestyle retail company that operates specialty retail stores in the U.S. BOOT has a Zacks Rank #2 and a VGM score of ‘A’. The company’s estimated earnings growth rate for the year is also positive.

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