The earnings results are usually the corner stone of gauging a company’s performance. The third-quarter 2017 earnings reporting cycle is drawing closer to an end where we already have a reasonably good picture of the winners and losers in this quarter. This gives investors a hands-on data to re-evaluate their portfolios and take on board stocks that promise handsome returns.
Among all the sectors, our focus here will be upon the Retail-Wholesale sector. A close look at the sector reveals that retailers continue to struggle in an Amazon (AMZN - Free Report) dominated market. With market share growing for Amazon Prime, Marketplace and Prime Air, as well as the launch of drone delivery, Amazon is poised for exceptional growth, which undoubtedly presents fierce competition for traditional retailers.
The rise of e-tailers has left the retail sector struggling with lower footfall at stores as all the brands are looking to directly sell to consumers through the expansion of digital stores. Further, these retailers are heavily investing in e-commerce and omni-channel functionalities, which are likely to weigh on margins at least in the near term.
As the holiday season, which accounts for a sizeable chunk of yearly revenues and profits for retailers, is just around the corner, analysts remain optimistic about the sector’s performance on grounds of gradual wage growth, lower inflation, low unemployment rate, an uptick in the U.S. consumer sentiment and a lift in economic activity post hurricanes. Characterized by the aforementioned improvement in the consumer backdrop, alongside early-hour store openings, huge discounts, promotional strategies, price matching and free shipping on online purchases, the holiday season this November and December is likely to be a huge success.
The nation's largest retail trade group, National Retail Federation (“NRF”) rightly projects retail sales for November and December (excluding autos, gas and restaurant sales) to improve 3.6-4% to $678.75-$682 billion, up from $655.8 billion (or 3.6% growth) last year and better than the five-year average sales growth of 3.5%. Additionally, the NRF projects online holiday sales to rise 7-10% to nearly $117 billion in November and December compared with a 9% improvement to $105 billion in 2015.
The NRF predicts sales for the period to benefit from a longer holiday season as Christmas is falling on Monday this year and 32 days after Thanksgiving. This will give retailers one extra day of sales from usual, as well as benefit last-minute shoppers in the weekend before Christmas.
While the holiday season is likely to impact the fourth-quarter of 2017, we bring our focus back to the third quarter, which is in its climax.
Q3 Earnings Scorecard
Looking at the earnings scorecard of the overall S&P 500 Index so far, about 436 S&P 500 members that together represent 87.2% of the Index’s total market capitalization have released third-quarter earnings results. Total earnings for these companies were up 6.8%, on 6.2% revenue growth. Further, about 73.4% delivered positive earnings surprises and about 67% beat revenue estimates.
Key takeaways from the results so far point to clear revenue momentum as top-line growth has been accelerating compared with other recent periods. Further, the quarter has witness an above-average proportion of positive surprises, reflecting the carry forward of momentum from the preceding quarter. Additionally, the estimates revision trend for the fourth quarter has been favorable, with earnings estimates holding up a lot better relative to other comparable periods.
Among the 16 Zacks sectors, results for the Finance sector have been below average this quarter. However, this earnings season has been favorable for the Energy, Industrial Products, Technology, Construction, Business Services, and Medical sectors.
Coming to expectations, total earnings for the quarter are expected to increase 6.2% year over year, with a 5.7% jump in revenues. Here, the strength in the Technology and Energy sectors are likely to balance the soft Finance sector results.
For the retail sector, in particular, earnings in the third quarter are expected to inch up 0.6%, with 6.2% revenue growth. Notably, the retail sector still has a sizable chunk of earnings to be reported. Only 47.4% of the S&P 500 members have reported results so far. Of these, 83.3% beat earnings estimates, while 66.7% topped revenue estimates. The sector has seen earnings for the quarter rise 2.9% thus far, with revenue growth of 10.9%.
The real picture of the trend so far is visible from our latest Earnings Trends report published on Nov 8.
That said, we bring to you seven retail stocks that may show promise based on their favorable Zacks Rank – Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) – and a positive Earnings ESP. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%. It makes sense to add these potential winners to your portfolio ahead of their releases. A rational investment can fetch higher returns on the heels of an earnings beat.
We have highlighted seven stocks that not only meet the prescribed criteria but have also convincingly beaten earnings estimates in the trailing four quarters, hold excellent prospects and are therefore well positioned for future earnings growth.
Burlington Stores Inc. (BURL - Free Report) , a retailer of branded apparel products in the United States, is a solid bet. The stock carries a Zacks Rank #2 and has an Earnings ESP of +1.17%. You may uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
The current Zacks Consensus Estimate for third-quarter fiscal 2017 is pegged at 64 cents per share, reflecting an uptrend in the last 30 days. This Burlington, New Jersey-based company delivered an average positive earnings surprise of 17.7% in the trailing four quarters, and has a long-term earnings growth rate of 17.4%. The company is expected to report results on Nov 28.
We also suggest investing in Dollar Tree Inc. (DLTR - Free Report) , an operator of discount variety stores offering merchandise at a fixed price point of $1.00. The company carries a Zacks Rank #2, a long-term earnings growth rate of 13.2% and an Earnings ESP of +1.83%. The current Zacks Consensus Estimate for third-quarter fiscal 2017 is pegged at 89 cents per share, which has been stable in the last 30 days and reflects a year-over-year growth of 10.3%. This Chesapeake, VA-based company delivered an average positive earnings beat of nearly 5% in the trailing four quarters. The company is scheduled to report results on Nov 21.
The Home Depot Inc. (HD - Free Report) , the world’s largest home improvement specialty retailer based on net sales with over 2,200 retail stores across the globe also holds promise. The company carries a Zacks Rank #2 and an Earnings ESP of +0.57%. The current Zacks Consensus Estimate for third-quarter fiscal 2017 is pegged at $1.81 per share, reflecting a year-over-year growth of 13.2%. The estimate for the quarter has witnessed an uptrend in the last 30 days. This Atlanta, GA-based company registered average positive earnings surprise of 3.8% in the trailing four quarters, and has a long-term earnings growth rate of 13.5%. The company is scheduled to report results on Nov 14.
Investors can also count on Ross Stores Inc. (ROST - Free Report) , an off-price retailer of apparel and home accessories, primarily in the United States. The company carries an Earnings ESP of +0.27% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
The current Zacks Consensus Estimate for third-quarter fiscal 2017 is pegged at 67 cents, which has been stable in the last 30 days. Further, it reflects growth of 7.8% from the prior-year quarter. This Pleasanton, CA-based company registered average positive earnings surprise of 6.3% in the trailing four quarters, and has a long-term earnings growth rate of 10%. The company is slated to report results on Nov 16.
Dollar General Corporation (DG - Free Report) , one of the largest discount retailers in the United States. that trades in low priced merchandise typically $10 or less also seems good. The company has an Earnings ESP of +1.65% and a Zacks Rank #3. The current Zacks Consensus Estimate for third-quarter fiscal 2017 is pegged at 93 cents per share, reflecting a year over year growth of 5%. This Goodlettsville, TN-based company registered an average positive earnings surprise of 1.8% in the preceding four quarters, and has a long-term earnings growth rate of 10.8%. The company is slated to report results on Dec 7.
We can also place our bets on Lowe's Companies, Inc. (LOW - Free Report) , one of the leading home improvement retailers, which has its operations primarily in the United States, Canada and Mexico. The company carries a Zacks Rank #3, a long-term earnings growth rate of 13.6% and an Earnings ESP of +0.18%. The current Zacks Consensus Estimate for third-quarter fiscal 2017 is pegged at $1.02 per share, which has been stable in the last 30 days and reflects a year-over-year growth of 15.5%. This Mooresville, NC-based company is scheduled to report results on Nov 21.
Last but not the least is Zumiez Inc. , with a Zacks Rank #2 and an Earnings ESP of +0.69%. The current Zacks Consensus Estimate for third-quarter fiscal 2017 is pegged at 48 cents a share, reflecting an uptrend in the last 30 days and year-over-year growth of 11.6%. This Lynnwood, WA-based specialty retailer of apparel, footwear, accessories, and hardgoods for young men and women has registered an average positive earnings surprise of 27.1% in the trailing four quarters, and has a long-term earnings growth rate of 18%. The company is expected to report results on Dec 7.
We believe that the above stocks with strong fundamentals and growth prospects are capable of meeting investor expectations. Your portfolio’s chance of giving higher returns increases if you have a favorably ranked stock powered by the optimism of earnings beat in the upcoming quarter.
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