It’s that time of the year again.
The holiday season is a make-or-break time for retailers. The period is marked by a flurry of deals as retailers flood the markets with offers and promotions. Since the season accounts for a sizeable chunk of yearly revenues and profits, retailers grab every opportunity to drive footfall. Traditionally, retail stocks get a push during the holiday season.
The Holiday Shopping Season So Far
A blockbuster Thanksgiving weekend and a buoyant Cyber Monday indicate that the season is turning out to be a bonanza for retailers, who are cashing in on customers preferring to shop from the comfort of their homes, mostly online or through their mobile phones.
Thanksgiving and Black Friday online sales touched a new record this year, surging 17.7% to $5.27 billion, per Adobe. Bargain hunters bought $3.34 billion worth of products online on Black Friday, an increase of 21.6% from last year, thus setting a new record. The euphoria did not end here, as the shopping frenzy was palpable on Cyber Monday when online sales jumped 12.1% to $3.45 billion.
On the flip side, increased online shopping resulted in lower footfall at stores. According to RetailNext, sales at brick-and-mortar stores on Thanksgiving Day and Black Friday declined 5%, while the number of transactions dropped 7.9%.
Economy Favors Shopping Frenzy
Post-Brexit, the U.S. economy looks quite steady and this holds good for the holiday season. The second estimate for GDP shows that the U.S. economy grew 3.2% in the third quarter, faring better than the first estimate of 2.9% growth and the second-quarter anemic increase of 1.4%. Given the rebounding economy, still lower gasoline prices and improving labor market with gradual increase in wages, the retail space is brimming with optimism.
These factors have boosted buyers’ confidence. According to the Conference Board data, the Consumer Confidence Index rose to 107.1 in November from October’s upward revised reading of 100.8, and is at its highest level in nine years. Per the preliminary reading of University of Michigan, Consumer Sentiment increased to 98 in December from 93.8 in November.
We expect this positive sentiment to propel consumer spending. Consumer spending increased 2.8% during the third quarter. The Commerce Department recently unveiled that consumer spending advanced 0.3% in October.
Strong Holiday Sales Forecast
Given the ability and willingness among consumers to spend more, retailers could hear their cash registers jingle. Data compiled by eMarketer suggests a 3.3% jump in holiday sales (November and December) to $884.5 billion. Retail e-commerce holiday season sales are anticipated to increase 17.2% and represent approximately 10.7% of total sales this season (or $94.71 billion).
The nation’s largest retail trade group, National Retail Federation, projects a 3.6% rise in November and December sales (excluding autos, gas and restaurant sales) to $655.8 billion, which is far better than the 10-year average sales growth of 2.5%. Non-store sales for the season are expected to increase 7–10% to approximately $117 billion.
4 Prominent Retail Stock Picks
With the advent of the holiday season, the retail sector takes center stage. So, how about betting your bucks on lucrative counters? We have highlighted four Retail/Wholesale stocks with a Zacks Rank #1 (Strong Buy) and a VGM Score of “A” or “B.”
Not only this, these stocks have outperformed their respective industries.
Investors can count on Best Buy Co Inc (BBY), a retailer of technology products, services, and solutions. The company posted an average positive earnings surprise of 25.7% in the trailing four quarters and has a long-term earnings growth rate of 11.9%. In the past six months, the stock has surged roughly 66.2% and outperformed the Zacks categorized Retail-Consumer Electronic industry, which gained 49.4%. The stock has a VGM Score of “A” and flaunts a Zacks Rank #1.
Burlington Stores Inc (URL), a retailer of branded apparel products, is a solid bet, with a Zacks Rank #1 and a VGM Score of “A.” The company posted an average positive earnings surprise of 25.6% in the trailing four quarters and has a long-term earnings growth rate of 19.9%. The stock has soared 38% in the past six months and comfortably outperformed the Zacks categorized Retail-Discount & Variety industry, which increased only 4.6%.
We suggest investing in Dave & Buster’s Entertainment, Inc. (PLAY), with a long-term earnings growth rate of 17.4% and a VGM Score of “B.” This owner and operator of entertainment and dining venues delivered an average positive earnings surprise of 37.8% in the trailing four quarters and carries a Zacks Rank #1. We note that in the past six months, the stock has advanced approximately 18%, while the Zacks categorized Retail-Food & Restaurants industry has shown a marginal increase of 2.5%.
You may also consider Tilly’s, Inc (TLYS), a retailer of casual apparel, footwear, and accessories. The stock sports a Zacks Rank #1 and has a VGM Score of “A.” The company posted an average positive earnings surprise of 98% in the trailing four quarters and has a long-term earnings growth rate of 15.5%. In the past six months, the stock has displayed a fabulous bull run in the index and risen over 100%, while the Zacks categorized Retail-Apparel/Shoe industry has increased 20.6%.
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