3 Retail Stocks Poised for Earnings Beats - Earnings ESP


3 Retail Stocks Poised for Earnings Beats

After a nerve wracking holiday season, retailers had a stormy start to the new-year with the chilly and windy weather in January and most of February freezing the profits for the majority of them. The weather turmoil at the beginning of the first quarter lowered the footfall at stores as consumers were unable to step out of their homes. Meanwhile, it hampered the day-to-day operations of stores as the severe winter weather caused several stores to remain closed either for partial or the full-day. As a result, most of the troubled retailers trimmed their forecasts for the first quarter by the end of February.

However, following the weather improvement through the second half of February and an extended winter (colder-than-usual) weather throughout March, the businesses of most retailers picked up. Increased promotions and demand for winter products helped clear the stocked up winter inventory in the second half of the first quarter. From the profitability perspective, the colder-than-usual weather in March facilitated the retailers to recover a portion of the loss suffered earlier in the quarter, closing the first quarter in line or above their revised forecasts. Apart from signaling a recovery, this has positioned retailers for the upcoming spring season, allowing them to stock up fresh inventory.

What's In-store for Retail on the Road Ahead?

The first quarter remained tricky in the hands of frigid weather not only for the retailers but for the economy as a whole. Looking at the bigger picture, the turbulent weather seemed to have brought the economic recovery in the U.S. to a standstill as it slowed business investment and discretionary consumer spending. This was reflected in the meager 0.1% increase in the average annual real gross domestic product (GDP) rate for the first quarter as against a 2.6% growth recorded in the final quarter of 2013.

However, most economists believe that this GDP data does not reflect the real state of the economy as a change in weather conditions had brought about a revival of business activities in March and a further boom in April as consumers started shelling out their money on purchases. As a result, consumer spending grew 0.9% in March, marking the highest growth in 4 ½ years.

A rebound of economic activity also mirrored in the recent data on employment, which indicates that U.S. employers have added a robust 288,000 jobs in April - the largest in two years. Unemployment rate fell 6.3% in April - the lowest level since Sep 2008 and down from 6.7% in March. Additionally, as the economy comes out of the winter freeze, the Federal Reserve recently lowered its asset buying to $45 billion under its Stimulus program, marking its fourth straight $10 billion cut. 

All said, agreeing to a rebound in the economy most economists have forecasted a 3.5% annual GDP growth rate for the second quarter of 2014.

Gaining confidence from the positive news flows, we believe Retail stands a strong chance of delivering a robust performance throughout 2014. Therefore, we suggest increasing positions on the retail stocks that are poised to beat earnings estimates in their upcoming announcements.  An earnings beat will reiterate investor confidence in these stocks, leading to rapid price appreciation.

How to Choose Right Stocks?

Picking the best stocks from the Retail/Wholesale space for one's portfolio is not a fairly simple task. However, an easy way to narrow down the list of choices during this earnings season is by looking at stocks that have the combination of a favorable Zacks Rank - Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) - and a positive Earnings ESP .

Earnings ESP is our proprietary methodology for identifying stocks that have the best chance to surprise with their next earnings announcement. It shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

For investors seeking to apply this strategy to their portfolio, we have highlighted 3 Retail/Wholesale stocks that may stand out this earnings season:

Foot Locker Inc. ( FL ): This is a Zacks Rank #2 stock with an earnings ESP of +1.91%. The current Zacks Consensus Estimate for first-quarter fiscal 2014 is pegged at $1.05. This New York City-based retailer of apparel, footwear and accessories had registered positive earnings surprise over the trailing four quarters with an average beat of +2.52%, and has a long-term earnings expectation of 9.4%.

-- The company is expected to report results on May 23, 2014.

Vitamin Shoppe Inc. ( VSI ): This nutritional products retailer carries Zacks Rank #3 with an earnings ESP of +1.47%. The current Zacks Consensus Estimate for first-quarter fiscal 2014 is pegged at 68 cents. This North Bergen, NJ-based company has posted a positive earnings surprise of 3.16% over the trailing four quarters and has a long-term earnings expectation of 15.3%.

-- Vitamin Shoppe is slated to report results on May 7, 2014.

Tim Hortons Inc. ( THI ): This company sports a Zacks Rank #3 and an earnings ESP of +3.28%. The current Zacks Consensus Estimate for first-quarter 2014 is pegged at 61 cents.  This Oakville, Canada based quick-service restaurant operator had recorded positive earnings surprise of +1.45% over the trailing four quarters and has a long-term earnings expectation of 10.2%.

-- The company is expected to report results on May 7, 2014.

Going Forward

We believe that the above-mentioned stocks, armed with strong fundamentals and growth prospects are good investment options at the moment. As the U.S. stocks are on the lookout for a survival strategy, a sneak peek into the retail space for some potential outperformers backed by a favorable Zacks Rank and a positive Zacks Earnings ESP could be handy for investors.

FOOT LOCKER INC (FL): Free Stock Analysis Report

TIM HORTONS INC (THI): Free Stock Analysis Report

VITAMIN SHOPPE (VSI): Free Stock Analysis Report

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Earnings

Referenced Stocks: GDP , FL , THI , VSI



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