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Retail Sales Up in May: Is a Future Rate Hike Likely?

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An anemic job report in May had raised questions about whether the economy was losing steam but it seems we finally have an answer. Retail sales rose steadily in May, as people went on to buy automobiles and a range of other goods despite an increase in gasoline prices, clearly indicating that the economy is gathering pace. This has set the stage right for policy makers to go for a rate hike, if not today, then probably in the near term.

Retail Sales Up: A Favorable Sign for the Economy

The Commerce Department unveiled that retail sales advanced 0.5% in May to $455.6 billion, faring better than analysts' expectations of a 0.3% rise and followed a robust increase of 1.3% recorded in April. Excluding automobiles, gasoline, building materials and food services, retail sales were up 0.4% last month. Auto sales inched up 0.5%, while receipts at gasoline stations grew 2.1%. Online retail sales jumped 1.3% in May.

The abovementioned data strongly suggests that consumer spending, which accounts for over two-thirds of U.S. economic activity, is improving. Consumer spending rose 1% in April, up significantly from a flat reading in March and a 0.2% jump in February. Strong consumer spending and an increase in retail sales is a sheer reflection of the economy gaining momentum which had nearly stalled in the beginning of the year, with a tepid 0.8% growth in the first quarter.

Does This Pave the Way for a Future Rate Hike?

Market experts remained cautiously optimistic about acceleration in economic growth in the second quarter. On the one hand, they are citing that consumers are likely to spend more, supported by rising income, an improving job market and gains in house price. Again, they are not ignoring the fact that consumer confidence dampened somewhat last month. Moreover, global economic headwinds such as yet-to-recover Chinese economy, fears of a Brexit and fluctuating commodity prices have been playing spoilsport.

Well, the Federal Reserve has been surely keeping a close watch on the ongoing economic activities and will arrive at a decision only after taking into account all the relevant factors. Last year in December, the Federal Reserve raised interest rates for the first time in almost a decade to a range of 0.25%−0.5%, and currently the market is bracing for another quarter-point increase. Industry analysts predict that encouraging economic data might reflect in an interest rate hike - a step toward "normalizing monetary policy" sometime in July.

Where to Bet Your Bucks?

When we bet on a stock, we always try to hit the jackpot. But striking the right chord each time needs a fair amount of luck. Nonetheless, the current economic scenario is making it tough for investors to arrive at an investment decision. But for now, betting your bucks on safer counters seems wise. Let's look for some retail stocks that could prove to be great additions against the backdrop of higher retail sales.

5 Prominent Picks

We suggest investing in Dave & Buster's Entertainment, Inc.PLAY , which flaunts a Zacks Rank #1 (Strong Buy). The Dallas, TX-based company delivered an average positive earnings surprise of 104.8% over the trailing four quarters. This owner and operator of entertainment and dining venues is expected to witness earnings growth of 29.2% in fiscal 2016 and 16.3% in fiscal 2017. The Zacks Consensus Estimate too has moved up over the past 30 days.

BurlingtonStores, Inc.BURL , with a Zacks Rank #2 (Buy) and a long-term earnings growth rate of 17.7%, is a solid bet. This Burlington, NJ-based retailer of branded apparel products delivered an average positive earnings surprise of 23.2% over the trailing four quarters. It is expected to witness earnings growth of 21.5% in fiscal 2016 and 16.5% in fiscal 2017. The Zacks Consensus Estimate too has been on the rise over the past 30 days.

Investors can also count on ULTA Salon, Cosmetics & Fragrance, Inc.ULTA , the specialty retailer of cosmetics, fragrance, haircare, skincare, bath and body products, with a Zacks Rank #2 and a long-term earnings growth rate of 19.5%. The Bolingbrook, IL-based company delivered an average positive earnings surprise of 7.9% over the trailing four quarters. It is expected to witness earnings growth of 22.8% in fiscal 2016 and 21.2% in fiscal 2017. The Zacks Consensus Estimate too has increased over the past 30 days.

The Home Depot, Inc.HD is another stock that deserves a place in your portfolio. It carries a Zacks Rank #2 and a long-term earnings growth rate of 13.7%. This Atlanta, GA-based home improvement retailer delivered an average positive earnings surprise of 4.2% over the trailing four quarters. It is expected to witness earnings growth of 16.5% in fiscal 2016 and 13.1% in fiscal 2017. The Zacks Consensus Estimate too has been trending up over the past 30 days.

Another addition to your portfolio can be BJ's Restaurants, Inc.BJRI . This operator of casual dining restaurants holds a Zacks Rank #2 and a long-term earnings growth rate of 17.9%. The Huntington Beach, CA-based company delivered an average positive earnings surprise of 18.5% over the trailing four quarters. It is expected to witness earnings growth of 22.1% in 2016 and 13.6% in 2017. The Zacks Consensus Estimate too has been rising over the past 60 days.

Bottom Line

A rise in retail sales definitely offers us a reason to cheer. Market pundits believe that an improving labor market and increasing income will surely boost confidence and instigate spending, which will ultimately translate into higher retail sales. And if this happens and sustains, it will largely help the economy to emerge strongly. In such a market scenario, retail will always be one of the lucrative sectors to invest in.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days.Click to get this free report >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

HOME DEPOT (HD): Free Stock Analysis Report

BJ'S RESTAURANT (BJRI): Free Stock Analysis Report

DAVE&BUSTRS ENT (PLAY): Free Stock Analysis Report

ULTA SALON COSM (ULTA): Free Stock Analysis Report

BURLINGTON STRS (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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