Last week, retail earnings were … well, they weren’t the best. In fact, retail stocks posted among some of the worst results Wall Street has seen in several years.
The giant department-store quartet of Macy’s Inc (NYSE:M), Kohl’s Corporation (NYSE:KSS), Nordstrom, Inc. (NYSE:JWN) and J C Penney Company Inc (NYSE:JCP) all reported one figure or another that missed already depressed investor expectations.
Not a single one of them reported positive comparable-store sales growth. Some missed on the top line. Some missed on the bottom line. Margins are a concern across the board. So is real estate exposure.
All of them are in the dumps.
The retail sector has been crushed, but this is creating a buying opportunity. Macroeconomic retail sales data implies that revenue growth woes are endemic to the department store sector. In other words, some decent retail stocks are getting thrown out with the bathwater.
This week, a slew of niche retail players are set to report earnings. Their stocks are almost all depressed after last week, which means that better-than-expected results could lead to sizable pops.
Here are my three favorite retail stocks right now. Consider snapping them up (or going long via options) ahead of earnings.
Retail Stocks to Buy Before Earnings: American Eagle Outfitters (AEO)
Reports: Wednesday, May 17, before the bell
Department stores might have put up ugly numbers last week, but that’s not an entirely accurate read on broad retail or even mall-specific retail. In fact, the data says that clothing stores are doing just fine in spite of department store weakness.
According to the U.S. Census Bureau, department stores saw sales contract 4.3% in March and 3.7% in April, lining up accurately with last week’s poor showing by department stores. Clothing stores, however, actually saw sales increase in both months. If this data is similarly accurate, that means good things for niche clothing retailers such as American Eagle Outfitters (NYSE:AEO).
AEO shares are off 14% this year, and is but a whisper of its pre-recession self. Still, while comps are falling almost everywhere else, American Eagle has managed upticks in that metric for several quarters. Gross margins are expanding while operating expenses are falling. Profits are actually stable.
American Eagle Outfitters has been an underappreciated story amid the retail wreckage, now trading at a mere 10 times next year’s earnings estimates.
That sets AEO stock up well for a big move to the upside if Wednesday morning’s earnings are robust. Census data seems to suggest it will be, as does my research of its online operations. SimilarWeb shows that ae.com is trending up in terms of online web traffic both domestically and globally, while Quantcast shows that ae.com traffic increased substantially year-over-year in recent months.
Expect AEO to rocket higher after its Wednesday report.
Retail Stocks to Buy Before Earnings: TJX Companies (TJX)
Shoppers are clearly trending away from big traditional department stores … and they’re increasingly gravitating toward off-price retailers such as TJX Companies Inc (NYSE:TJX) brands T.J.Maxx, Marshalls and HomeGoods.
The proof is in the numbers. While Macy’s hasn’t put up a positive comps number in some time, TJX posted a 3% improvement in same-store sales last quarter, on top of a 6% jump in the year-ago quarter.
Still, poor TJX sold off along with the rest of the retail sector last week.
A 5% selloff in just a few days is providing a solid opportunity to buy the dip of a retailer with pretty resilient shares compared to its peers. It also provides an opportunity to buy before what I think will be a blowout earnings report.
SimilarWeb data is exceptionally bullish on TJX, with tjmaxx.com online traffic share growing globally, domestically and among clothing websites. Google Trends data is equally bullish, with search interest so far this year up about 8%.
Also, at 22 times trailing earnings, TJX stock is in a (relative) valuation trough, setting the stock up nicely for a big upward move on an earnings beat.
For those investors looking to pick up scraps from last week’s retail wreckage, I think TJX stock is a good place to start.
Retail Stocks to Buy Before Earnings: Ross Stores (ROST)
My third pick is another major off-price retailer, Ross Stores, Inc. (NASDAQ:ROST).
The broad logic on ROST is similar to TJX. Dollars are leaving mall department stores and migrating toward TJX’s brands and Ross Stores. So while the department stores might have just offered up ugly numbers, I don’t expect to see anything similar from the off-price space.
Ross’ numbers have also been strong of late, including 4% higher comps last quarter, and a 7% burst the quarter prior to that.
ROST is actually up by about 15% over the past year, versus 25% declines for Macy’s and 45% declines for JCPenney. And still, the market continues to throw in the towel for Ross Stores every time the big department players report grim figures. ROST has given back about 5% in just three days.
This setup looks very similar to 2016’s third-quarter report. Ross Stores fell in late October and early November to around $60 as retailers disappointed, blaming consumer anxiety related to the election. But Ross Stores blew that theory out of the water, reporting a 7% rise in comps. ROST stock shot up to nearly $70 by mid-November.
I think we get a similar move this week. The valuation has depressed enough to attract big buyers, and the report should stand in stark contrast to the garbage retail delivered last week.
As of this writing, Luke Lango long AEO, KSS, ROST and TJX.