The retail sector performed impressively in 2019 supported by a buoyant consumer environment marked by a solid labor market, rise in disposable income and an uptick in consumer sentiment. Meanwhile, the U.S. economy has lost its pace although it is growing for the 11th year on the trot. Nonetheless, several retail stocks skyrocketed in 2019. Some of those stocks still carry strong growth potential for 2020.
Retail Sector Shines in 2019
The Zacks defined Retail and Wholesale sector rallied more than 22% in 2019. Moreover, this sector has started 2020 from where it ended last year. Year to date, the retail sector has gained 2.34% and is currently in the top 7% of the Zacks defined 16 broad sectors.
Retailers have been benefiting from their concerted endeavors like product innovation, introduction of new styles, merchandise replenishment and store refurbishments and expansion to fuel sales.
Moreover, initiatives such as building omnichannel, coming up with loyalty and marketing programs, enhancing the supply chain and providing faster delivery options are aiding growth. Simultaneously, companies are investing in renovation and improved checkouts, and mobile point-of-sale capabilities to keep stores relevant.
Expectations of Strong Holiday Sales
Several research firms and investment banks have estimated that 2019-2020 holiday sales are likely to surpass market expectations. This indicates strong spending by Americans, which constitutes 70% of the country’s GDP.
According to Mastercard SpendingPulse, retail sales in the United States from Nov 1 to Dec 24 of 2019 rose 3.4% year over year. National Retail Federation envisions holiday retail sales to advance 3.8-4.2% this season (excluding automobiles, restaurants and gasoline). Online and other non-store sales are expected to grow 11-14%.
Bank of America expects holiday shopping season to see sales growth of up to 5%, after a strong month-over-month gain of 0.3% in December and 3.2% growth year over year. Moreover, data compiled by Deloitte indicates that holiday sales are projected to increase 4.5-5% between November 2019 and January 2020. Meanwhile, e-commerce sales are estimated to improve 14-18%.
Phase-One Trade Deal
The United States and China will sign an interim trade deal on Jan 15. This will be the first major positive development in the nearly two-year long trade tussle. Per the deal, the U.S. government has decided not to impose $160 billion of fresh tariffs on China. This decision is a major relief to the retail sector. Most of these targeted Chinese goods are used as low-cost inputs for U.S. consumer goods.
Our Top Picks
At this stage, it will be prudent to invest in retail stocks with strong growth potential. While, several good retail stocks are available, selecting the best may be difficult. Our VGM Score will be useful in taking the right decision.
We narrowed down our search to five retail stocks each carrying a Zacks Rank #1 (Strong Buy) and a VGM score of either A or B. You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows price performance of our five picks in the past three months.
Hibbett Sports Inc. (HIBB - Free Report) is engaged in the retail of athletic-inspired fashion products through its stores. Its stores offer a range of merchandise, including athletic footwear, athletic and fashion apparel, sports equipment, and related accessories. It operates in two segments, Lawson and Bolt. The company has an expected earnings growth rate of 10.2% for the current year (ending January 2021). The Zacks Consensus Estimate for the current year has improved by 20% over the last 60 days.
Arcos Dorados Holdings Inc. (ARCO - Free Report) operates as a franchisee of McDonald's restaurants. It has the exclusive right to own, operate, and grant franchises of McDonald's restaurants in 20 countries. The company has an expected earnings growth rate of 35.5% for the current year. The Zacks Consensus Estimate for the current year has improved by 2.4% over the last 60 days.
RH (RH - Free Report) operates as a retailer in the home furnishings. It offers products in various categories, including furniture, lighting, textiles, bathware, décor, outdoor and garden, tableware, and child and teen furnishings. The company has an expected earnings growth rate of 18.5% for the current year (ending January 2021). The Zacks Consensus Estimate for the current year has improved by 10.6% over the last 60 days.
Genesco Inc. (GCO - Free Report) operates as a retailer and wholesaler of footwear, apparel, and accessories. It operates through four segments: Journeys Group, Schuh Group, Johnston & Murphy Group and Licensed Brands. The company has an expected earnings growth rate of 12.3% for the current year (ending January 2021). The Zacks Consensus Estimate for the current year has improved by 7.9% over the last 60 days.
Rite Aid Corp. (RAD - Free Report) operates a chain of retail drugstores in the United States. It operates through two segments, Retail Pharmacy and Pharmacy Services. The company has an expected earnings growth rate of 70.6% for the current year (ending February 2021). The Zacks Consensus Estimate for the current year has improved by 544.4% over the last 60 days.
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