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5 Potential Winners in the Retail Space This Earnings Season

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The Retail-Wholesale sector is hogging all the attention, and this time for good reasons. For the time being, the expression "retail apocalypse” appears to be a thing of past. The sector has certainly been bearing the brunt of heightened online competition, lower footfall and changing consumer spending patterns but of late the tables are turning in favor of the retailers. Stocks once bogged down by tough environment are now suddenly climbing the charts.

The sector, which currently occupies the top 19% (3 out of 16) position in the list of 16 Zacks categorized sectors, has advanced 42.5% in a year and comfortably outperforming the S&P 500’s  growth of 26.6%. Moreover, according to the latest Earnings Trends report, the sector is expected to record top and bottom-line growth of 8.6% and 5.3%, respectively, in this reporting cycle.

As of Jan 24, 2018, about 15.4% of the S&P 500 companies in the Retail sector have reported their results, wherein 66.7% companies delivered an earnings beat, while 100% surpassed revenue estimates. Earnings of these companies rose 9.3%, revenues surged 10.5%.

Sector Holds the Baton

Favorable economic indicators along with friendlier fiscal and regulatory policies from the current regime bode well for the sector. Analysts pointed that a buoyant stock market, gradual wage acceleration, improved employment picture, rising consumer confidence and modest inflation are enough to trigger consumer spending.  Notably, consumer spending increased at a rate of 3.8% in the fourth quarter of 2017, per the Commerce Department’s latest data.

Higher spending clearly indicates that the holiday season turned out to be a blissful one for retailers as consumers continued to fill their shopping carts. The festive season showcased a stellar performance since the recession of 2008. Per National Retail Federation, sales (excluding autos, gas and restaurant sales) during the November/December period increased 5.5% to $691.9 billion, surpassing its own projection of a 3.6-4% rise. Online shopping, which is included in the results, surged 11.5%.

Another reason why the sector grabbed investors’ attention is the latest tax reform that has resulted in lowering the corporate tax rate to as much as 21%, and retailers will be the beneficiary of the same. Analysts believe that a lower tax burden is likely to allow the retailers to channelize the surplus money to best possible options. They may go for a dividend hike, or reduce debt load, or create a corpus to fund acquisitions, or invest in enhancing omni-channel capabilities, new product launches and any other innovations.

Picking the Prospective Winners for the Season

All said, we used the Zacks methodology and identified retail stocks that not only boast solid fundamentals but are also poised to beat earnings estimates this earnings season. Our research shows that for stocks with the combination of a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP, 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.

Thus, investors can count on these stocks which are most likely to trump estimates.

Dollar Tree, Inc. (DLTR - Free Report) , which is expected to report fourth-quarter fiscal 2017 results on Mar 7, is a solid bet with a long-term earnings growth rate of 13.3%. The Zacks Consensus Estimate for the quarter is pegged at $1.88. The company delivered an average positive earnings surprise of 7.4% in the trailing four quarters. This operator of discount variety stores has an Earnings ESP of +1.16% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Investors can even count on Macy's, Inc. (M - Free Report) with a Zacks Rank #2 and an Earnings ESP of +1.29%. The Zacks Consensus Estimate for the quarter is pegged at $2.66. In the preceding two quarters, the company has outperformed the consensus mark. It has a long-term earnings growth rate of 8.5%. This department store retailer is slated to report fourth-quarter fiscal 2017 results on Feb 27.

Another lucrative option is Ross Stores, Inc. (ROST - Free Report) , an off-price retailer of apparel and home accessories. The stock has a Zacks Rank #2 and an Earnings ESP of +1.91%. The Zacks Consensus Estimate for the quarter is pegged at 93 cents. The company registered an average positive earnings surprise of 5.5% in the trailing four quarters and has a long-term earnings growth rate of 10%. The company is slated to announce fourth-quarter fiscal 2017 results on Mar 6.

You may also consider is The Home Depot, Inc. (HD - Free Report) with a Zacks Rank #3 and an Earnings ESP of +0.29%. The Zacks Consensus Estimate for the quarter is pegged at $1.61. The company delivered an average positive earnings surprise of 3.9% in the trailing four quarters. It has a long-term earnings growth rate of 14.6%. This home improvement retailer is scheduled to come out with fourth-quarter fiscal 2017 financial numbers on Feb 20.

We also suggest investing in Tiffany & Co. (TIF - Free Report) , which is expected to report fourth-quarter fiscal 2017 results on Mar 16. This designer, manufacturer and retailer of jewelry has a Zacks Rank #3 and an Earnings ESP of +0.89%. The Zacks Consensus Estimate for the quarter is currently pegged at $1.61. The company has a long-term earnings growth rate of 11.2% and delivered an average positive earnings surprise of 5.3% in the trailing four quarters.

These five stocks are not the only ones to bet on. With the help of the Zacks Stock Screener and some permutation and combination, you can find out other retail stocks that have the potential to deliver a positive earnings surprise.

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