It is again that time when the earnings outcome of companies grabs all the attention. Analyst opinion, at this time, is usually centered on whether a company delivers an earnings beat or a miss. The first-quarter 2018 reporting cycle has almost crossed the half-way mark, with a robust picture of all-round strength. With solid earnings and sales growth so far, this season is likely to record the highest growth in seven years.
Among all the sectors, our focus here will be on Retail-Wholesale, which is presumed to be invariably in business. While the majority of the players generally report earnings in the last leg of the reporting cycle, we note that there is significant momentum in these stocks due to a favorable economic backdrop. The sector is gaining from favorable economic data, including steady rise in wages, stable labor market and improved consumer spending.
Consequently, the sector has gained 5.1% in the past month, outpacing the S&P 500’s growth of 1.3%.
Consumer spending, which accounts for 70% of the economic activity, rose 0.4% in March, following 0.2% growth in January and remaining flat in February. This renewed momentum in March emerged from continued rise in incomes, indicating that consumers may drive economic growth in 2018.
The well-being of consumers is usually linked to the prosperity of retailers as this segment attracts a large sum of total spending. We believe that the increased spending in March will somewhere reflect in earnings of retailers, who will report first-quarter outcomes very soon.
As per National Retail Federation (NRF), total retail sales increased 5% year over year in March and 0.3% from February. This included a 7.6% increase in online and other non-store retail sales. Moreover, NRF continues to project retail sales growth of 3.8-4.4% for 2018.
A close look at the sector reveals that retailers are reaping the benefit of increased investments in digital commerce, as evident from significant growth in e-commerce sales. Digital sales have been the key contributing factor in the top-line growth of most retailers. Additionally, this has led to a revival in the comparable store sales (comps) trend of the sector on the whole.
However, the sector is grappling with soft margins due to higher investments to enhance presence and increased operating costs. Increased promotional activities, higher spending toward online portal and lower traffic at stores are some other issues, denting retailers’ margins. While retailers are resorting to strict cost-cutting measures to lift margins, a turnaround on this front may take time.
Q1 Earnings Scorecard
Looking at the earnings scorecard of the overall S&P 500 Index so far, about 267 S&P 500 members released first-quarter earnings results. Total earnings for these companies are up 25.1%, on 10% revenue growth. Further, about 76.8% delivered positive earnings surprises and 73.8% beat revenue estimates. The blended beat ratio (companies beating both earnings and revenues) so far has been 61.4%.
Key takeaways from results so far point to clear momentum both for revenues and earnings growth. Further, the quarter has witnessed an above-average proportion of positive earnings surprises while revenue surprises are tracking below that of the preceding earnings season.
Coming to expectations, total first-quarter earnings for the S&P 500 are expected to increase 22.6% year over year on 8.4% rise in revenues. This follows 13.4% earnings growth and 8.6% revenue increase in the fourth quarter of 2017.
For the retail sector, earnings in the first quarter are expected to improve 17.8%, with 7.8% revenue growth.
The real picture of the trend so far is visible from our latest Earnings Preview report, published on Apr 27.
That said, we bring to you five stocks from the Retail-Wholesale sector that may show promise based on their favorable Zacks Rank – Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) – and a positive Earnings ESP. Our research shows that stocks with this combination have as high as 70% chances of delivering positive earnings surprise. It makes sense to add these potential winners to your portfolio, ahead of their releases. A rational investment can fetch higher returns on the heels of an earnings beat.
Our Picks
We have highlighted five stocks that not only meet the criteria but have also convincingly surpassed earnings estimates in the trailing four quarters, have excellent prospects and are therefore positioned for earnings growth.
Retail Stocks to Snap Up on Solid Q1 Earnings Momentum: Burlington Stores Inc (BURL)
Burlington Stores Inc (NYSE:BURL), a retailer of branded apparel products in the United States, is a solid bet. The stock carries a Zacks Rank #2 and has an Earnings ESP of +0.64%. You may uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
The Zacks Consensus Estimate for first-quarter fiscal 2018 is pegged at $1.09 per share, reflecting year-over-year growth of 49.3%. Further, estimates for the quarter under review have been going up in the last 30 days.
This Burlington, NJ-based company delivered an average positive earnings surprise of 15% in the trailing four quarters. Its long-term earnings growth rate is 18.6%. The company is expected to report results on May 24.
Retail Stocks to Snap Up on Solid Q1 Earnings Momentum: Dollar General Corp. (DG)
We also suggest investing in Dollar General Corp. (NYSE:DG), one of the largest discount retailers in the United States.
The company has a Zacks Rank #2, long-term earnings growth rate of 14.6% and an Earnings ESP of +1.38%. The Zacks Consensus Estimate for first-quarter fiscal 2018 is pegged at $1.40 per share, reflecting year-over-year growth of 35.9% and an uptrend in the last 30 days.
This Goodlettsville, TN-based company delivered in-line earnings in the last reported quarter. The company is expected to report results on Jun 7.
Retail Stocks to Snap Up on Solid Q1 Earnings Momentum: Nordstron, Inc. (JWN)
Investors can also count on Nordstrom, Inc. (NYSE:JWN), a fashion specialty retailer that offers high-quality apparel, shoes, cosmetics and accessories for men, women and kids. The company has an Earnings ESP of +8.97% and a Zacks Rank #2.
The Zacks Consensus Estimate for first-quarter fiscal 2018 is pegged at 42 cents, which was stable in the last 30 days. This Seattle, WA-based company registered average positive earnings surprise of 16.8% in the trailing four quarters and has long-term earnings growth rate of 6%. The company is scheduled to report results on May 17.
Retail Stocks to Snap Up on Solid Q1 Earnings Momentum: Ross Stores, Inc. (ROST)
Ross Stores, Inc. (NASDAQ:ROST), an off-price retailer of apparel and home accessories in the United States, also looks promising. The company carries a Zacks Rank #3 and an Earnings ESP of +12.99%. The Zacks Consensus Estimate for first-quarter fiscal 2018 is pegged at $1.07 per share, reflecting year-over-year growth of 30.5%.
Estimates for the quarter have witnessed an uptrend in the last 30 days. This Pleasanton, CA-based company registered average positive earnings surprise of 6.1% in the trailing four quarters and has long-term earnings growth rate of 10%. The company is slated to report results on May 24.
Retail Stocks to Snap Up on Solid Q1 Earnings Momentum: Urban Outfitters, Inc. (URBN)
Last but not least, Urban Outfitters, Inc. (NASDAQ:URBN) has a Zacks Rank #2 and an Earnings ESP of +0.62%. The Zacks Consensus Estimate for first-quarter fiscal 2018 is pegged at 29 cents a share, reflecting year-over-year growth of 123.1% and an uptrend in the last 30 days.
This Philadelphia, PA-based lifestyle specialty retailer, which offers fashion apparel and accessories, footwear, home décor and gifts products, has registered an average positive earnings surprise of 8.5% in the trailing four quarters.
The company has long-term earnings growth rate of 12%. It is scheduled to report results on May 22.
Bottom Line
We believe that the above stocks, with strong fundamentals and growth prospects, are capable of meeting investor expectations. Your portfolio’s chances of giving higher returns increase if you have a favorably ranked stock, powered by the optimism of earnings beat in the upcoming quarter.
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