The retail landscape has been witnessing a sea change with the focus gradually shifting to online shopping. This transition in consumer shopping pattern is compelling retailers to fast adapt to the changes in the ecosystem. Retailers now have no option left than to keep pace with the changing retail scenario or get eliminated.
With the digital transformation in shopping and consumers splurging online, store and mall traffic has been hit hard. As a result, most retailers including big-box ones are struggling to compete with e-commerce channels. They are being forced to trim their store count to focus more on an online model. Retailers are now focusing more on enhancing their omni-channel capabilities, optimizing store fleet and restructuring activities.
Besides this shifting retail landscape, the industry is facing major challenges from a strong U.S. dollar, volatile commodity costs and soft global economic environment. A strong dollar has resulted in lower spending from foreign tourists and is also impacting retailers with overseas operations. As a result, retailers are slashing prices and focusing on promotions to attract traffic.
How is the Retail Sector Placed?
Although the Retail-Wholesale sector, which is at the bottom 19% of the Zacks Sector Rank (13 out of 16), has not been an outstanding performer it still holds some promise, given the favorable economic indicators. We note that so far in the year, the sector has registered an increase of 14.9% compared with the S&P 500 that was up roughly 9%.
The rebound in oil prices from all-time lows, decelerating unemployment rate, and a gradual improvement in the housing market signal that the economy is on a recovery mode. These factors are playing a crucial role in raising consumers’ confidence. We expect this positive sentiment to translate into higher consumer spending. U.S. consumer spending leaped to a four-month high in April and personal income also rose. Consumer spending rose 0.4% in April, following a 0.3% uptick in March.
This calls for investing in the retail space. Here we have highlighted five Retail/Wholesale stocks with a favorable combination of a Zacks Rank #1 (Strong Buy) or #2 (Buy) and a VGM Score of “A” or “B”.
These retail stocks are backed by sound fundamentals, surging share price and a track record of better-than-expected results.
We suggest investing in Children’s Place Inc (NASDAQ:PLCE), with a long-term earnings growth rate of 8% and a VGM Score of “A”. In the past one year, PLCE stock has surged roughly 42% and outperformed the Zacks categorized Retail-Apparel/Shoe industry, which declined 18.5%. This specialty retailer of children’s apparel delivered an average positive earnings surprise of 36.6% over the trailing four quarters and flaunts a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Another lucrative option is Best Buy Co Inc (NYSE:BBY), which has a long-term earnings growth rate of 11.8% and a VGM Score of “A”. This retailer of technology products, services, and solutions delivered an average positive earnings surprise of 33.8% in the trailing four quarters and carries a Zacks Rank #1. We note that in the past one year, BBY stock has advanced approximately 97.3%, while the Zacks categorized Retail-Consumer Electronic industry has gained 69.7%.
You may also consider Big 5 Sporting Goods Corporation (NASDAQ:BGFV), which operates as a sporting goods retailer. The stock sports a Zacks Rank #1 and has a VGM Score of “A”. Big 5 Sporting Goods posted an average positive earnings surprise of 94.5% in the trailing four quarters and has a long-term earnings growth rate of 12%. In the past one year, BGFV stock has displayed a fabulous bull run on the index and has risen 56.2%, while the Zacks categorized Retail – Miscellaneous/Diversified industry decreased 6.3%.
Investors can count on Darden Restaurants, Inc. (NYSE:DRI), an operator of full-service restaurants, with a long-term earnings growth rate of 10.9%. Darden posted an average positive earnings surprise of 3.4% over the trailing four quarters and has a VGM Score of “A”. In the past one year, this Zacks Rank #2 stock has exhibited a bullish run and surged roughly 34.7%, while the Zacks categorized Retail-Food & Restaurants industry gained 12.4%.
Office Depot Inc (NASDAQ:ODP), a supplier of office products and services, with a long-term earnings growth rate of 11.4% is a solid bet. Office Depot posted positive earnings surprise in the trailing three quarters and has a VGM Score of “B”. In the past one year, this Zacks Rank #2 stock has exhibited a bullish run and surged 47.1%, while the Zacks categorized Retail – Miscellaneous/Diversified industry decreased 6.3%.
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