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Brush Off Walmart Woes, Retail Sales to Grow in 2018: 5 Picks

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Though Walmart Inc.’s (WMT - Free Report) e-commerce sales did not grow as fast as expected last quarter, the retail giant has ample ways to please its online and instore shoppers. Walmart has planned to make huge investments in the online space this year, while its bricks-and-mortar stores will drive grocery orders and same-day deliveries. Investment in new brands and technology should also attract customers, which will eventually help the company achieve its sales goal.

The retail industry expects to see sales growth this year and continue the momentum of a strong holiday season. Higher consumer confidence, record low jobless rate and solid wage growth are expected to boost retail sales throughout the year, while the Republican tax cut will help retailers save a whopping $175 billion, per the National Retail Federation (NRF). This extra cash can be used to buy back shares, pay dividends, and execute mergers and acquisitions.

With the overall trend in the retail industry remaining promising, investors should double down on the hottest retailers right away.

Efforts to Please Online & Instore Customers

Walmart’s online sales rose 23% in the final quarter of 2017, lagging the previous quarter’s 50% rise. In fact, sales jumped 60% in the two periods prior to that. The decline in growth rattled investors as it implied the company is not in a position to fend off competition from Internet giant, Inc. (AMZN - Free Report) . Walmart saw its steepest one-day drop in three decades on Feb 20, plummeting 10.2% (read more: Walmart’s Q4 Earnings Miss Hurts Stock, Comps Up Again).

Nonetheless, Walmart has more avenues to regain the interest of online and instore customers. The company is planning to make extensive investments in e-commerce operations later this year, which will drive online sales by 40% in fiscal 2019. The retailer has already scooped up e-commerce sites like to strengthen its online presence.

Walmart has also dropped “Stores” from its corporate name, giving an impression that it intends to operate as more than a traditional store-based company. By the way, Walmart’s stores does help it gain an edge over Amazon. The retailer is planning to double the locations offering grocery delivery that should boost sales. CEO Doug McMillon in the earnings call has said that “stores are executing better, we’re innovating more, and customers are responding with higher sales and traffic.”

Lest we forget, Walmart will completely revamp its website with a focus on fashion and home goods later this spring. The retailer will partner with Hudson’s Bay-owned Lord & Taylor in order to bring high-end clothing items to its website, which should bode well in the near future.  

Retail Sales to Grow in 2018

The NRF has predicted retail sales growth of solid 3.8% to 4.4% this year over 2017. When it comes to online and other non-store sales, the numbers are expected to increase by 10% to 12%. Retail sales have grown a healthy 3.9% to $3.53 trillion in 2017 from 2016, as per preliminary estimates from the U.S. Census Bureau.

Meanwhile, January retail sales fell unexpectedly. After all, U.S. retail sales dropped 0.3% last month largely due to a decline in motor vehicle, gasoline, food services, and home appliances sales. But, the core retail sales that show the GDP’s consumer spending segment remained unchanged, which shows that retail sales remained nearly as good as the holiday season’s strong showing (read more: Retail is Staging a Big Comeback in 2018: 5 Solid Buys).

NRF President and CEO Matthew Shay further added that “with consumer confidence high, unemployment low and wages growing, there is every reason to believe that retail sales will be robust throughout the year.”

Catalysts Behind the Surge

The University of Michigan’s consumer sentiment index increased from 95.7 in January to 99.9 in February. This was the highest recorded since 2004 and the second highest since the 13-year high hit in October 2017. This reading exceeded most economists’ expectations of 95.5 to 95.7 (read more: Consumer Sentiment Soars to Record High: 5 Picks).

The labor market, in the meantime, has come a long way since the Great Recession, with broad-based job gains in January. Non-farm payrolls climbed by 200,000 jobs in January after rising 160,000 last December, per the Labor Department. In fact, the economy added jobs for 88 successive months, while unemployment rate remained unchanged at a 17-year low of 4.1%.

But, it was wage growth that hit the fastest pace last month in more than eight-and-a-half years. Average hourly wages increased 9 cents, or 0.3%, to $26.74. This helped the average year-on-year hourly earnings to rise to 2.9%, the highest since June 2009. Needless to say, several states have raised wages. Minimum wage has been raised in 18 states in January, which had a positive impact on 4.5 million workers, per the Economic Policy Institute (read more: Wages See Fastest Growth Since 2009: Top 5 Gainers).

5 Solid Picks

Given the aforesaid positives, investing in sound retail stocks seems judicious. We have thus selected five such retailers to boost your returns. Such stocks also possess a Zacks Rank #1 (Strong Buy) or 2 (Buy). The favorable Zacks Rank should help these stocks gain further this year.

Kohl's Corporation (KSS - Free Report) operates department stores in the United States. The stock has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings increased 8.8% over the last 90 days. The company is expected to return 8.5% this year, in contrast to the industry’s projected decline of 4.1%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Best Buy Co., Inc. (BBY - Free Report) operates as a retailer of technology products, services, and solutions in the United States. The company has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings increased 0.2% over the last 90 days. The stock is expected to return 13.5% this year versus the industry’s estimated return of 10.6%.

Conn's, Inc. (CONN - Free Report) — a Zacks Rank #1 company — operates as a specialty retailer of durable consumer goods and related services in the United States. The Zacks Consensus Estimate for its current-year earnings increased 23.9% over the last 90 days. The company is expected to return more than 100% this year, in comparison to the industry’s estimated return of 10.6%.

RH (RH - Free Report) , together with its subsidiaries, operates as a retailer in the home furnishings market. The company has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings increased 3.5% over the last 90 days. The company is expected to return 132.5% this year, in contrast to the industry’s decline of 4.7%.

Walmart operates retail stores in various formats worldwide. The company has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings increased 0.5% over the last 90 days. The stock is expected to give a return of 2.8% this year, while the industry’s return is likely to remain unchanged.

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