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.
We note that U.S. retail sales in May recorded the steepest drop (down 0.3%) in 16 months. But sales at non-store retailers inched up 0.8% sequentially and increased 10.2% from the prior-year period. Kiplinger's latest forecast shows that retail sales, excluding gasoline, are expected to jump 3.5% in 2017. The report further suggests that e-commerce sales are expected to increase 15% this year compared with 13% in 2016.
Looking Beyond Brick & Mortar
Evidently, technology is playing a major role and the perfect example of the same is the news of Whole Foods Market, Inc. 's WFM buyout by Amazon.com Inc.AMZN . Analysts are looking at this mammoth acquisition as an amalgamation between the online marketplace and physical stores that could bring a massive change in the retail industry going forward.
Amazon has been in the spotlight for the last few years, as changing customer patterns have made the retail industry more dependent on e-commerce. It had earlier announced its plan to acquire online retail platform Souq.com to tap into the Middle East market. The company entered the Chinese market with the buyout of Joyo.com, an online retailer of music, books, videos and DVDs.
Meanwhile, Wal-Mart Stores, Inc.WMT has been steadily making its way in the fast-growing online retail market. This is quite evident from the retail bellwether's recent buyouts, which include Jet.com, a U.S.-based e-commerce company; ModCloth, an online clothing seller; Moosejaw, an outdoor apparel and gear retailer; and ShoeBuy, an e-commerce shoe retailer. The company is on track to acquire Bonobos, a men's clothing e-commerce company, for $310 million.
Sector's Correlation with the Economy
Although the Retail-Wholesale sector, which is at the bottom 6% of the Zacks Sector Rank (15 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 14.8% compared with the S&P 500 that is up roughly 9.2%.
The rebound in oil prices from all-time lows, improving employment scenario 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. Consumer Confidence Index rose to 118.9 this month from May's reading of 117.6.
This calls for investing in the retail space. Here we have highlighted five Retail-Wholesale stocks that have a favorable Zacks Rank - Zacks Rank #1 (Strong Buy) or #2 (Buy) and have been given a Strong Buy/Buy rating by 80% or more brokers.
5 Prominent Picks
We suggest investing in Conn's, Inc.CONN with a long-term earnings growth rate of 18.5%. In the past one year, the stock has zoomed over 100% and outperformed the Zacks categorized Retail-Consumer Electronic industry, which advanced 66.2%. This specialty retailer of durable consumer goods and related services delivered an average positive earnings surprise of 80.9% 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 .
Strong Buy or Buy broker rating: 80%
You may also consider Alibaba Group Holding LimitedBABA , which operates as an online and mobile commerce company and sports a Zacks Rank #1. The company posted an average positive earnings surprise of 20.5% in the trailing four quarters and has a long-term earnings growth rate of 30.4%. In the past one year, the stock has displayed a fabulous bull run on the index and has risen 78.4%, while the Zacks categorized Electronic Commerce industry gained 54.3%.
Strong Buy or Buy broker rating: 100%
Another lucrative option is The Children's Place, Inc.PLCE , with a Zacks Rank #1 and long-term earnings growth rate of 8%. In the past one year, the stock has surged roughly 29.7% and outperformed the Zacks categorized Retail-Apparel/Shoe industry, which declined 16%. This specialty retailer of children's apparel delivered an average positive earnings surprise of 36.6% over the trailing four quarters.
Strong Buy or Buy broker rating: 87.5%
Investors can count on Dave & Buster's Entertainment, Inc.PLAY , an operator of entertainment and dining venues, with a long-term earnings growth rate of 16.5%. The company posted an average positive earnings surprise of 30.5% over the trailing four quarters. In the past one year, this Zacks Rank #1 stock has exhibited a bullish run and surged roughly 43.2%, while the Zacks categorized Retail-Food & Restaurants industry gained 10.9%.
Strong Buy or Buy broker rating: 100%
Burlington Stores, Inc.BURL , a retailer of branded apparel products, with a long-term earnings growth rate of 15.9% is another solid bet. The company posted an average positive earnings surprise of 22.6% over the trailing four quarters. In the past one year, this Zacks Rank #2 stock has soared 39.1%, while the Zacks categorized Retail-Discount & Variety industry fell 9.4%.
Strong Buy or Buy broker rating: 90.9%
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