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Buck the Retail Slump with These 5 Solid Picks

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Last month, U.S. retail sales suffered their largest decline since Jan 2016. A report from the U.S. Census Bureau shows that the drop was primarily attributable to a concurrent fall in gasoline prices. Additionally, a relatively smaller number of cars and trucks were purchased last month.

However, retail sales registered a moderate level of year-over-year growth. This suggests that the sector’s fortunes are in keeping with that of the wider economy. Though May’s decline was reflected across most categories, some still fared relatively, better remaining unchanged or even posting small increases. Investing in stocks from these areas can make for a prudent option at this time.  

Largest Decline in 16 Months

In May, retail sales declined by 0.3%, belying expectations of a small, but significant 0.1% increase. The figure also compares poorly with the unrevised 0.4% increase reported in April. An unusually late Easter holiday and the payout of tax refunds had ensured that sales in April experienced an improvement.

In contrast, sales weakened in May, primarily due to the 2.4% decline in sales at gasoline stations. This is, of course, a major positive for consumers since it increases their purchasing power substantially going forward. Meanwhile, sales at auto and other motor vehicles dealers also declined, by 0.2%, last month. This fall also had a major impact on the composite reading since they account for nearly 20% of all retail sales.

Declines were also witnessed across most other categories, but this may have had only a limited impact. Sales at electronics and appliance stores declined by 2.8%, marking the sharpest fall since Mar 2010. Additionally, food services and drinking places sales experienced a 0.1% decline while sporting goods, hobby, book and music stores witnessed their receipts falling by 0.6%. The steady rise of online retail led to sales at department stores falling by 1%.

Moderate Growth Trend Intact

Looking past the gloom, a year-over-year increase of 3.8% proves that a moderate growth trend for the retail sector remains firmly in place. Moreover, sales for the first five months of 2017 have registered an increase of 3.9% compared to the same period last year. A strong jobs market, soft interest rate regime and increasing home sales will continue to push consumer expenditure higher. The CPI declined by 0.1% in May to underline the fact that levels of inflation continue to remain low.

More importantly, not every category experienced a downturn last month. Sales for building material, garden equipment and supplies remained flat while registering a year-over-year increase of 10.8%. This development was sufficient to boost Home Depot by 1.8% on Wednesday, which in turn helped the Dow end with gains.

Among the notable gainers for May were clothing and clothing accessories stores which experienced monthly and yearly increases of 0.3% and 1%, respectively. Furniture and home furnishing stores experienced a 0.4% increase in May and posted a 4.4% year-over-year increase. But the largest gainer for the month was non-store retailers. This category added 0.8% to sales and clocked up a 10.2% yearly increase, clearly benefiting from the furious pace of growth in the online sales space.    

Our Choices

Despite the slowdown experienced in May, retail sales continue to be supported by the factors which have fueled gains for most of the year. The job market remains in good health and inflation remains low. Though the slump in receipts at gasoline stations impacted the overall figure last month, lower fuel prices have also boosted consumers’ purchasing power.

Picking stocks from retail categories which registered gains even during a difficult month makes for a smart choice at this point. We have narrowed down our search to the following stocks based on a good Zacks Rank and other relevant metrics.

PetMed Express, Inc. (PETS - Free Report) is a leading nationwide pet pharmacy. PetMed Express’ product line contains approximately 750 SKUs catering to dogs, cats and horses.

PetMed Express has a Zacks Rank #1 (Strong Buy). Its expected earnings growth for the current year is 6.6%. Its earnings estimate for the current year has improved by 1.1% over the last 30 days. The stock has returned 104.9% over the last one year, outperforming the Zacks Internet - Commerce sector, which has gained 51% over the same period.

Insight Enterprises, Inc. (NSIT - Free Report) is a global direct marketer of brand name computers, hardware and software.

Insight Enterprises has a Zacks Rank #1. Its expected earnings growth for the current year is 22.1%. Its earnings estimate for the current year has improved by 8.5% over the last 60 days. The stock has returned 57.3% over the last one year, outperforming the Zacks Retail - Mail Order sector, which has declined 2.9% over the same period.

J.Jill, Inc. (JILL - Free Report) operates as a specialty retailer of women’s apparel.

J.Jill has expected earnings growth of 24.6% for the current year. Its earnings estimate for the current year has improved by 7.6% over the last 30 days. The stock has returned 4% over the last one year, easily outperforming the Zacks Retail - Apparel And Shoes sector, which has declined 12.1% over the same period. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Children's Place, Inc. (PLCE - Free Report) is a growing specialty retailer of apparel and accessories for children from newborn to twelve years of age.

The Children's Place has a Zacks Rank #1. Its expected earnings growth for the current year is 33.7%. Its earnings estimate for the current year has improved by 9.1% over the last 30 days. The stock has returned 46.7% over the last one year, outperforming the Zacks Retail - Apparel And Shoes sector, which has declined 12.1% over the same period.

American Woodmark Corp. (AMWD - Free Report) manufactures and distributes kitchen cabinets and vanities for the remodeling and new home construction markets.

American Woodmark has a Zacks Rank #2 (Buy). The company has expected earnings growth of 10.1% for the current year. Its earnings estimate for the current year has improved by 2.5% over the last 30 days. The stock has returned 49.8% over the last year, outperforming the Zacks Furniture sector, which has gained 16.2% over the same period.

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