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Retailers Pin Hopes on Upbeat Consumer Confidence: 5 Picks

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Soft August retail sales may have dampened retailers’ spirits for a brief period but buoyant consumer sentiment has ignited hopes of an euphoric holiday season. U.S. Consumer Confidence — a key determinant of the economy’s health — reached its highest level since September 2000. Per the Conference Board data, the Consumer Confidence Index surged to 138.4 in September from August’s reading of 134.7 driven by strengthening labor market, tax reform and rising income.

Rising Consumer Confidence Signals Good Times

Americans are way more confident now, brushing aside recent hiccups like the U.S.-China trade concerns, higher gasoline prices and tightening of monetary policy. Fall in the number of people claiming unemployment benefits and jobless rate hovering at an 18-year low also bear testimony to the same. Certainly, upbeat sentiment is likely to translate into increased consumer spending, which is expected to remain strong in the months ahead.

An uptick in consumer spending — one of the pivotal factors driving the economy — is always welcome news. Considering these bullish aspects, industry experts believe that retailers may clink glasses to great holiday sales. They are even ready to walk the extra mile to woo bargain hunters through various means like early-hour store openings, huge discounts, smart promotional efforts and free shipping on online purchases.

Deloitte’s recent holiday sales projection of a 5-5.6% increase hints at happy times ahead for retailers. Holiday sales, excluding motor vehicles and gasoline, are likely to be more than $1.10 trillion between November 2018 and January 2019. Meanwhile, e-commerce sales are estimated to improve 17-22% to reach $128-$134 billion.

Tariff Tiff May Kill Retailers’ Appetite

Analysts pointed that improving consumer confidence highlights the underlying strength in the economy. For obvious reasons, retailers are the ultimate gainers. However, the recent imposition of 10% tariff on goods worth $200 billion imported from China has not gone down well with retailers. Moreover, tariffs will increase to 25% starting next year. Market pundits cited that retailers will have no choice but to look for a cheaper production hub.

Industry analysts hinted that rising duties will compel retailers to raise prices as and when feasible, since it will not be possible for them to absorb the rising costs alone. Any increase in prices will impact consumers’ purchasing activity. Meanwhile, if retailers choose to keep prices at current levels, it will come at the cost of margins. Retailers are already grappling with thin margins due to investments made in omni-channel capabilities and same-day delivery options to expedite the shopping process this holiday season.

Nonetheless, with festive season a couple of months away, the sector is likely to catch investors’ attention. So, picking up stocks from the space will be a prudent move. Notably, the Retail-Wholesale sector has advanced roughly 30% in a year, outpacing the S&P 500’s growth of approximately 17%.

5 Prominent Picks

Here are five stocks you can count upon. We have shortlisted them on the basis of a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a VGM Score of A or B.

We suggest investing in Urban Outfitters, Inc. (URBN - Free Report) with a long-term earnings growth rate of 12%. This lifestyle products and services company engaged in the retail and wholesale of general consumer products has delivered an average positive earnings surprise of 17.7% in the trailing four quarters. The stock has a VGM Score of A and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

You can also add Zumiez Inc. (ZUMZ - Free Report) to your portfolio. This specialty retailer of apparel, footwear and, accessories has a VGM Score of A. This Zacks Rank #1 stock posted an average positive earnings surprise of 9.6% in the trailing four quarters.

Another stock worth considering is Burlington Stores, Inc. (BURL - Free Report) , which has a long-term earnings growth rate of 20.2%. This retailer of branded apparel products delivered an average positive earnings surprise of 11.4% in the trailing four quarters. The stock, which carries a Zacks Rank #2, has a VGM Score of A.

Investors can also count on BJ's Restaurants, Inc. (BJRI - Free Report) , which owns and operates casual dining restaurants. This Zacks Rank #2 company has a long-term earnings growth rate of 15.3% and a VGM Score of A. The company has delivered an average positive earnings surprise of 6.4% in the trailing four quarters.

Target Corporation (TGT - Free Report) , which operates as a general merchandise retailer, is also a solid bet with a Zacks Rank #2. The company has a long-term earnings growth rate of 6.7% and a VGM Score of A. It has recorded an average positive earnings surprise of 1.3% in the trailing four quarters.

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