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4 Retail Stocks to Buy Despite Soft February Sales

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U.S. retail sales remained soft in the month of February per the recent data released by the United States Commerce Department, reflecting a decline of 0.1%, way behind the consensus expectation of 0.4% growth. January data, however, was revised upward to show sales dipping 0.1% instead of decline of 0.3% as previously reported. It marked three months of decline in a row, since April 2012.  

Among the various components of the retail sales, vehicles sales declined 0.9% in February, according to the monthly report. Furthermore, furniture sales, health care and personal care sales, declined 0.8% and 0.4%, respectively. Sales at gasoline stores were down 1.2% and food sales decreased 0.1%.

However, the month’s bright spots were a 1.9% increase in building materials against a decline of 1.7% in January and 0.2% restaurant sales growth from a 0.1% gain the previous month. Also, sales at non-store retailers jumped 1% after a sharp fall in January.

Is There a Cause for Concern?

Following the data release, J.P. Morgan cut its first-quarter 2018 GDP forecast from 2.5% to 2%, while Goldman Sachs reduced the same to 1.8% from 2%. The Atlanta Fed’s GDP estimate fell to 1.9%, down from 2.5%.

Given that retail sales for the first two months of the first quarter were not so strong, its contribution to the quarter’s GDP should be below than last quarter and weigh on economic growth. In the fourth quarter, the economy grew 2.5%, but expectations are growth of 3% per the third revision which is due later this month.

However, looking further, core retail sales (which exclude sales related to vehicles, gasoline, building materials and food services and more closely indicate GDP trends)  inched up 0.1% after remaining unchanged in the month of January. The number was, however, lower than the consensus estimate of a 0.5% gain. Also, the monthly report states that retail sales increased 4% year over year, provided some breather.

Economists believe that an increase in spending on services should buoy first-quarter retail sales results and there is the likelihood of strong service spending given solid recent data.

Strong Service Sector Growth

Institute for Supply Management (ISM) data for the month of February showed that the non-manufacturing index (NMI) was 59.5, topping analysts’ estimates of 58.4. This was also more than an average of 57 for all of 2017. NMI reading above 49% indicates an expansion for the broader economy.

The non-manufacturing index saw uninterrupted expansion for the 97th consecutive month and indicated that the broader economy is on track for steady growth this year. Expansion was witnessed in sectors related to education services, transportation and warehousing, utilities, real estate, finance & insurance, healthcare, construction, mining, retail trade, agriculture and information. Service spending trends thus look rosier, which should aid U.S. retail sales in the first quarter of 2018.  

Alongside, the environment for the retail sector remains favorable against the backdrop of economic strength underpinned by gradual wage acceleration, a 17-year low unemployment rate and rising consumer confidence, and a reduction in tax rate.  

The Retail-Wholesale sector (one of the 16 Zacks sectors) has put up a good show by advancing roughly 10.7% in the last three months, comfortably outperforming the S&P 500’s growth of approximately 3.1%.

Top 4 Picks

Given the prospective growth of retail sales, investors may consider buying sound stocks from this space. We have, thus, selected four stocks that should be accretive  to your portfolio. These stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy). Our search was also narrowed down with a VGM Score of A or B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.

Dollar General Corp. (DG - Free Report) a discount retailer in the United States. The company separates its merchandise into four categories, which include highly consumable, seasonal, home products and basic clothing. Dollar General has a Zacks Rank #2 and a VGM Score of B. The Zacks Consensus Estimate for its current-year earnings rose 6.5% in the last 60 days.

The stock’s expected growth rate for the current year is 27.4% versus the industry’s projected rally of 18.2%. Dollar General has outperformed the broader industry in past six months (+21% vs. +18%). You can see the complete list of today’s Zacks #1 Rank stocks here

Burlington Stores, Inc. (BURL - Free Report) operates as a retailer of branded apparel products in the United States. The company offers fashion-focused merchandise. Burlington Stores has a Zacks Rank #2 and a VGM Score of B.

The Zacks Consensus Estimate for its current-year earnings rose 9.5% in the last 60 days. The stock’s expected growth rate for the current year is 32.1% versus the industry’s projected rally of 18.2%. Burlington Stores has outperformed the broader industry in the past six months (+43% vs. +17%).

BJ’s Resturants, Inc. (BJRI - Free Report) , which owns and operates restaurants in the United States, has a Zacks Rank #2 and a VGM Score of B. The Zacks Consensus Estimate for its current-year earnings rose 7.1% in the last 60 days.

The stock’s expected growth rate for the current year is 27% versus the industry’s projected rally of 12%. Burlington Stores has outperformed the broader industry in last six months (+45% vs. +5%).

Ruth's Hospitality Group, Inc. (RUTH - Free Report) is the largest fine dining steakhouse company in the country, as measured by the total number of company-owned and franchisee-owned restaurants.

Ruth's Hospitality has a Zacks Rank #2 and a VGM Score of B. The Zacks Consensus Estimate for its current-year earnings rose 17.4% in the last 60 days. The stock’s expected growth rate for the current year is 23% versus the industry’s projected growth of 12%. Ruth's Hospitality has outperformed the broader industry in last six months (+20% vs. +5%).

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