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Bolstering Consumer Confidence Holds Promise for Retailers

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A decent run in the U.S. stock market, sturdy retail sales data along with solid job addition in July and improvement in the manufacturing sector have lifted investors’ mood as well as highlighted the solid economic report card. These were reflected in Consumer Confidence — a key determinant of the economy’s health — that reached its second highest level in August since late 2000. As per the Conference Board data, the Consumer Confidence Index surged to 122.9 last month from July’s revised reading of 120.

The rebound in oil prices from all-time lows, improving labor market and gradual recovery in the housing market signal that the economy is on a recovery mode. Per the Labor Department, the economy added 209,000 jobs in July, up from 231,000 and 145,000 in June and May, respectively, while the unemployment rate was 4.3%. These factors are favorable for retailers and definitely play a crucial role in raising buyers’ confidence. We expect this positive sentiment to translate into higher consumer spending that may help revive sales.

U.S. retail sales in July recorded biggest increase this year. The Commerce Department stated that U.S. retail and food services sales in July rose 0.6% to $478.9 billion — following a revised reading of 0.3% growth registered in June. Retail sales increased 4.2% from July 2016. Sales were widespread in July, mostly led by strong demand for new autos and Internet shopping. Meanwhile, sales at non-store retailers jumped 1.3%.

This latest report on retails sales unveils that consumers have significant buying power as the third quarter got underway. We note that the consumer outlays grew 2.8% in the second quarter. Consumer spending at retail outlets was off to a good start, banking on strong labor market and improved household finances. This looks favorable for retailers.

Changing Retail Dynamics

Given the favorable economic indicators, the Zacks Retail-Wholesale sector holds some promise. We note that so far in the year, the sector has registered an increase of 14.9% compared with the S&P 500’s gain of roughly 9.4%. Kiplinger’s latest forecast shows that retail sales, excluding gasoline, are expected to jump 4% in 2017. The report further suggests that e-commerce sales are expected to increase 14% this year.

The retail landscape has been undergoing a fundamental change, with technology playing a major role and the focus shifting to online shopping. Inc. (AMZN - Free Report) has been in the spotlight for the last few years, as changing customer patterns made the retail industry more dependent on e-commerce.

This transition in consumer shopping pattern is compelling retailers to fast adapt to the changes in the ecosystem. Retailers now have no option left but to keep pace with the changing retail scenario or get eliminated. They are now focusing more on enhancing omni-channel capabilities, optimizing store fleet and restructuring activities.

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

The Children's Place, Inc. (PLCE - Free Report) , Best Buy Co., Inc. (BBY - Free Report) , Macy's, Inc. (M - Free Report) , Target Corporation (TGT - Free Report) , Wal-Mart Stores, Inc. (WMT - Free Report) and other renowned retailers are trying all means to reach their target customers.

Zacks Rank

Among the aforementioned stocks, The Children's Place flaunts a Zacks Rank #1 (Strong Buy) and Best Buy carries a Zacks Rank #2 (Buy), while the remaining stocks carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

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