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Pick Target & These 4 Retail Stocks for a Standout Portfolio

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Target Corporation (TGT - Free Report) has been ramping up its efforts to tough it out in the intensely-competitive retail space. Development of omni-channel capacities, diversification and localization of assortments, and emphasis on flexible format stores to generate higher sales productivity are a few tricks up its sleeves.

It is also offering same-day delivery options and is working toward augmenting the supply chain. It is deploying resources for technology and process improvements. It has been investing in groceries as well to keep afloat. Meanwhile, the company has made significant headway in same-day delivery with the takeover of Internet-based grocery delivery service provider, Shipt.

Other notable endeavors include the Target Restock program that enables customers to restock their shipping boxes with essential items online and get them delivered at their doorstep by the next business day for a nominal charge. Drive Up, an app-based service, is another initiative that expedites the shopping process.

Further, it is going to launch a loyalty program — Target Circle — nationwide on Oct 6. The program will help customers experience more convenient and customized shopping in the upcoming holiday season.

Such concerted efforts drive traffic, favorable store comps and comparable digital sales. We note that the company’s comparable sales rose 3.4% during the second quarter of fiscal 2019, marking the ninth successive quarter of increase. Comparable digital channel sales surged 34% and added 1.8 percentage points to comparable sales.

Buoyed by the above-mentioned factors, shares of this Minneapolis, MN-based company have appreciated 62.4% so far this year compared with the industry’s growth of 38.1%. This Zacks Rank #2 (Buy) stock has also comfortably outperformed the Retail-Wholesale sector and the S&P 500 Index that rallied 21.2% and 18.5%, respectively.

Why the Retail Sector?

Like Target, there are prominent retailers that are going strong on a favorable consumer environment and strategic endeavors. These retailers are making prudent investment decisions, focusing on cost containment, enhancing omni-channel capacities, introducing brands, refurbishing stores and expanding same-day delivery options.

Undoubtedly, the sector’s prospects are closely tied to the purchasing power of consumers, who look pretty confident courtesy of a solid labor market and rise in disposable income. A preliminary reading of the University of Michigan shows that consumer sentiment index rose to 92 in September, from a nearly three-year low reading of 89.8 in August.

With consumers feeling confident, retail sales are trending up. Per the Commerce Department, U.S. retail and food services sales advanced 0.4% in August. This follows an upwardly revised increase of 0.8% in July. The latest retail sales data indicates that consumers are somewhat resilient against trade-related concerns and sluggish business spending.

4 Prominent Picks

We have shortlisted stocks on the basis of a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a VGM Score of A or B. Also, the stocks have outperformed the sector. You can see the complete list of today’s Zacks #1 Rank stocks here.

RH (RH - Free Report) , a retailer in the home furnishings, is a solid bet. It has a Zacks Rank #1 and a VGM Score of B. The company, with a long-term earnings growth rate of 12.5%, has an average positive earnings surprise of 20.2% for the trailing four quarters. Moreover, the Zacks Consensus Estimate for its current-year earnings suggests a year-over-year improvement of 25.6%. The stock has risen roughly 44.2% year to date.

Another stock worth considering is Zumiez Inc. (ZUMZ - Free Report) , with a long-term earnings growth rate of 12% and a VGM Score of A. This specialty retailer of apparel, footwear, accessories, and hardgoods has an average positive earnings surprise of 60.9% for the last four quarters. Moreover, the Zacks Consensus Estimate for its current-year earnings indicates a year-over-year improvement of 20.5%. Shares of this Zacks Rank #1 company have surged roughly 66.3% so far this year.

Investors can also count on Lithia Motors, Inc. (LAD - Free Report) , which operates as an automotive retailer. This Zacks Rank #1 company has a long-term earnings growth rate of 9.2% and a VGM Score of A. The company has an average positive earnings surprise of 8% for the trailing four quarters. Moreover, the Zacks Consensus Estimate for its current-year earnings calls for a year-over-year improvement of about 12.8%. The stock has rallied about 73.5% so far this year.

One can also lay a wager on Aaron's, Inc. (AAN - Free Report) , which has a long-term earnings growth rate of 15% and a VGM Score of A. This omnichannel provider of lease-purchase solutions has an average positive earnings surprise of 3.2% for the trailing four quarters. Moreover, the Zacks Consensus Estimate for its current-year earnings indicates a year-over-year rise of 17.4%. Shares of this Zacks Rank #2 company have risen approximately 45.4% year to date.

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