4 Rock Solid Retail Stocks to Beat Earnings this Season

As fourth-quarter earnings draws to a close, the trend so far has been of earnings growth rate which is set to mark the quarter as second highest in the past two years. Further, this is the second consecutive quarter of positive earnings after five quarters of back-to-back declines. With most sectors about to draw their curtains, but the main show remains for the Retail/Wholesale sector.

Glimpse at Retail Sector

In the past three months, the Zacks categorized Retail-Wholesale industry has gained 3.7%, lagging the S&P 500 index which witnessed a gain of 6.7%. The retail landscape has been undergoing a fundamental change in recent years, with technology leaving a deep and lasting impact on the space. Online shopping dominates the space now with its effective grip steadily taking over the minds of consumers. This shift in buying behavior has forced retailers to come up with new ways to market their products. At this crucial juncture, change has become the need of the hour, and retailers and manufacturers who have responded quickly to it by staying technologically ahead stand in good stead.

Parallel to this shifting retail landscape, the industry is facing major challenges from a still-strong U.S. dollar, volatile commodity costs and an uncertain global macroeconomic environment.

Nevertheless, retailers are efficiently allocating a large chunk of their capital toward a multi-channel growth strategy focused on improving merchandise offerings, developing IT infrastructure to enhance the web and mobile experience of customers. Further, the retailers are renovating stores, developing fulfilment centers to enable speedy delivery, implementing an enterprise-wide inventory management system as well as enhancing their relationship with existing and new customers.

On the other hand, the latest Earnings Preview report as of Feb 17 unveils a mixed scenario. About 47% of the total number of S&P 500 companies in the Retail/Wholesale sector has reported results, wherein 55% beat earnings estimates, while 20% surpassed revenue expectations. While earnings climbed 5.8% year over year, revenues rose 7.1%, lagging the preceding four quarters average earnings and revenues growth rate of 8.4% and 10.1%, respectively. The sector is displaying weakness, with total earnings expected to decline 1.2%, while revenues are projected to increase 4.7%.

Can Domestic Economic Numbers Turn the table?

Despite retail sector's lukewarm performance so far in the fourth quarter of 2016, it still holds promise, given the favorable economic indicators.

U.S. retail sales rose in January, as people went on to buy electronics and appliances, spend more at restaurants and gasoline stations, and bought a range of other goods. This indicates that the economy is quite steady at the moment and is ready for the transition from Obama's administration to Trump's. The result is quite evident from an improving job scenario, rising wages and growing confidence which have led consumers to spend more.

The Commerce Department stated that U.S. retail and food services sales for the first month of 2017 increased 0.4% to $472.1 billion, following a revised upward reading of 1% growth registered in December. Retail sales increased 5.6% from Jan 2016. This shows that consumer spending - accounting for over two-thirds of U.S. economic activity and one of the pivotal factors driving the economy - remains strong.

The recent rebound in oil prices , an encouraging employment picture, and a gradual improvement in the manufacturing sector and housing market signal that the economy is on a recovery mode.

According to the "advance estimate" unveiled by the Bureau of Economic Analysis, the U.S. economy expanded 1.9% in the final quarter of 2016. Moreover, the economy added 227,000 jobs in January, while the unemployment rate was at 4.8%. The favorable economic scenario may prompt the Federal Reserve to increase the benchmark interest rate at least twice this year.

4 Prominent Picks

You must have noticed how some stocks skyrocket after their earnings release. Studies indicate that on an average, positive earnings surprises drive strong returns in share price for several weeks following the report. The reporting period is undoubtedly considered the ideal time to rebalance one's portfolio.

Here we have highlighted four Retail/Wholesale stocks that have potential to register an earnings beat. These stocks carry a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP . You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%. An earnings beat boosts investor confidence in the stock, which in turn is reflected in its rapid price appreciation. These stocks could therefore turn out to be great additions to your portfolio ahead of their earnings releases.

Investors can bank on Burlington Stores, Inc. ( BURL ), retailer of branded apparel products, which is scheduled to report its fourth-quarter fiscal 2016 results on Mar 2. The company registered 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 company has an Earnings ESP of +1.18% and sports a Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank stocks here .

Investors may consider Dick's Sporting Goods Inc. ( DKS ), which is likely to report its fourth-quarter fiscal 2016 results on Mar 14. This sporting goods retailer posted an average positive earnings surprise of 8.8% in the trailing four quarters, and has a long-term earnings growth rate of 12.8%. The company has an Earnings ESP of +0.77% and sports a Zacks Rank #3.

Best Buy Co., Inc. ( BBY ), a multinational specialty retailer of consumer electronics, home office products, entertainment software, appliances and related services has an Earnings ESP of 1.81% and carries a Zacks Rank #3. In the preceding four quarters, the company's earnings have surpassed the Zacks Consensus Estimate with an average beat of 25.7%. Further, it has a long-term earnings growth rate of 11.9%. The company is slated to report its fourth-quarter fiscal 2017 results on Mar 1.

Dollar Tree, Inc. ( DLTR ), an operator of discount variety stores is scheduled to report fourth-quarter fiscal 2016 results on Mar 1, is a solid bet. The company posted an average positive earnings surprise of 2.4% in the trailing four quarters, and has a long-term earnings growth rate of 16.7%. The stock has an Earnings ESP of +0.75% and carries a Zacks Rank #2.

Zacks' Top 10 Stocks for 2017

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Dollar Tree, Inc. (DLTR): Free Stock Analysis Report

Dick's Sporting Goods Inc (DKS): Free Stock Analysis Report

Burlington Stores, Inc. (BURL): Free Stock Analysis Report

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

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

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