The earnings season is past its peak with results from more than 330 S&P 500 members on board. But the main show still remains for the Retail-Wholesale sector, which is likely to take the center stage as the reporting cycle ramps up. The sector — comprising namely apparel & shoes, discount and department stores — has gained approximately 8.5% so far in the year and has outperformed the S&P 500 index that advanced 8.1%.
Factors Shaping the Outcome
A favorable consumer environment and strategic endeavors undertaken at company level are working in tandem for the sector. It goes without saying that the sector’s prospects are closely tied to the purchasing power of consumers. In fact, strengthening labor market and rising disposable income are forming a perfect base for higher consumer spending.
Notably, retailers are making prudent investments, focusing on cost savings and constantly revisiting their loyalty and marketing programs to engage better with customers. Apart from the above-mentioned factors, enhancement of omni-channel capacities, introduction of new brands, refurbishment of stores, and expansion of same-day delivery options have also been playing crucial roles.
These favorable factors paint a rosy picture for a number of players this reporting cycle, which generally coincides with the holiday season. Per the report from Mastercard SpendingPulse sales from Nov 1 through Dec 24 increased 5.1% to more than $850 billion. The festive season is “make or break time” for retailers and companies vie to seize the bigger slice.
As companies are trying all means to gain market share, costs associated with promotional activities and an aggressive pricing strategy have been eating into margins. Meanwhile, any deleverage in SG&A rate, higher labor and occupancy costs, and increased marketing and other store-related expenses are also adding to woes.
Per the latest Earnings Preview, Retail-Wholesale sector is anticipated to witness bottom-line growth of 21%, while the top line is projected to increase 5.6% from the year-ago level. The earnings season has witnessed releases from about half of the retail companies in the S&P 500 cohort.
For the 43.6% sector components on the S&P 500 Index that have reported results, total earnings surged 33.2% on 12.6% higher revenues. We note 64.7% of the companies have been successful in beating earnings as well as revenue estimates.
The encouraging figures suggest that there are a number of companies likely to beat earnings estimates. Investing in such companies can fetch handsome returns for investors. This is because a stock generally surges upon earnings beat.
Likely 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 reporting cycle. 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.
5 Prominent Picks
Foot Locker, Inc. (FL - Free Report) is a solid bet with a long-term earnings growth rate of 7.5%. The Zacks Consensus Estimate for the to-be-reported quarter is pegged at $1.36, reflecting an increase of 7.9% year over year. This athletic shoes and apparel retailer registered average positive earnings surprise of 6.8% in the trailing four quarters. The company, which is slated to announce fourth-quarter fiscal 2018 results on Mar 1, has an Earnings ESP of +2.78% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Another lucrative option is Five Below, Inc. (FIVE - Free Report) , a specialty value retailer. The stock has a Zacks Rank #2 and an Earnings ESP of +0.45%. The Zacks Consensus Estimate for the fourth quarter of fiscal 2018 is pegged at $1.57, reflecting year-over-year growth of about 33%. The company registered average positive earnings surprise of 9.1% in the trailing four quarters. It has a long-term earnings growth rate of 30.3%.
The Kroger Co. (KR - Free Report) with a Zacks Rank #2 and an Earnings ESP of +3.42%, also deserves a place in your portfolio. The Zacks Consensus Estimate for the to-be-reported quarter is pegged at 51 cents. The company delivered average positive earnings surprise of 8.9% in the trailing four quarters. It has a long-term earnings growth rate of 6.8%. This operator of supermarket chain is slated to come out with fourth-quarter fiscal 2018 results on Mar 7.
You may also consider Walmart Inc. (WMT - Free Report) with an Earnings ESP of +5.55% and a Zacks Rank #3. The Zacks Consensus Estimate for the to-be-reported quarter is pegged at $1.33, flat year-over-year. The company delivered average positive earnings surprise of 3% in the trailing four quarters. It has a long-term earnings growth rate of 5.1%. This operator of supercenters, supermarkets, hypermarkets and warehouse clubs, is scheduled to come out with fourth-quarter fiscal 2019 financial numbers on Feb 19.
Investors can count on The Home Depot, Inc. (HD - Free Report) , which operates as a home improvement retailer. The company delivered an average positive earnings surprise of 5.8% in the trailing four quarters. It has a long-term earnings growth rate of 12.9%. The Zacks Consensus Estimate for the to-be-reported quarter is pegged at $2.16, reflecting an increase of 27.8% year over year. The company, which is scheduled to announce fourth-quarter fiscal 2018 results on Feb 26, has an Earnings ESP of +0.71% and a Zacks Rank #3.
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