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4 Retail Picks to Beat on Earnings Despite Soft Holiday Sales

Zacks Equity Research
Updated

After a subdued holiday season performance, investors are gradually losing confidence in retail stocks. The stocks which used to be favorite picks just before the start of the season are now struggling to find a place in investors’ portfolio. Although a fair number of retailers bore the brunt of unusually warm weather, a strong dollar and shift toward online shopping, not all succumbed to these headwinds. In fact, there were some strong contenders too.

Nevertheless, with this write-up, we are making a sincere effort to bring your attention back to retail stocks that are poised to beat earnings estimates even under adverse conditions, as we move ahead in the Q4 earnings season.

Holiday Season: A Sneak Peek

The retail battle is at its peak during the holiday season, with offers and promotions flooding the markets. This time too, retailers swept buyers off their feet with early-hour store openings, huge discounts, promotional strategies, and free shipping on online purchases. Despite these efforts, retailers did not hear their cash registers jingle. Cheap gasoline, a better job picture and increased consumer confidence too failed to perk up holiday sales, leaving investors perplexed.

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Data compiled by the National Retail Federation revealed that retail sales during the holiday period (November/December combined) increased 3% to $626.1 billion, falling short of the projected 3.7% jump as well as 4.1% growth registered in 2014. However, the only bright spot was the digital business. Online sales rose 9% to $105 billion, surpassing the retail trade group’s expectation of 6%–8% growth.

While Macy’s, Inc. M, The Gap, Inc. GPS and Zumiez, Inc. ZUMZ delivered dismal performances, J. C. Penney Company, Inc. JCP and L Brands, Inc. LB witnessed comparable sales growth. (Read: Holiday Sales Disappoint, Challenges Await Retailers in 2016)

Market experts believe that after a dismal holiday season in 2015, challenges await retailers in 2016. Cost containment initiatives, involving headcount reduction and store closures to better withstand competitive pressure from both brick-and-mortar discount stores and online retailers, remain in the cards.

How to Pick the Right Stock?

Picking the best stocks from the Retail/Wholesale space for one’s portfolio is a fairly simple task. One way to narrow down the list of choices is to look at stocks that have the combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) – and a positive Zacks 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 4 Retail/Wholesale stocks poised to outperform estimates. An earnings beat boosts investor confidence in the stock, which is reflected in the rapid stock price appreciation. Thus, these stocks could turn out to be great additions to your portfolio ahead of their earnings releases.

4 Stocks to Put Your Money Into

We have highlighted four stocks that have convincingly beaten earnings estimates in the trailing four quarters, hold excellent prospects and are therefore well positioned for future earnings growth. Here are the picks:

Express Inc. EXPR, the specialty apparel and accessories retailer, is a solid bet. The stock flaunts a Zacks Rank #1 and has an Earnings ESP of +1.56%. The current Zacks Consensus Estimate for the fourth quarter of fiscal 2015 stands at 64 cents, portraying roughly 31.3% growth from the prior-year quarter. Based in Columbus, OH, the company delivered an average positive earnings surprise of 34.3% over the trailing four quarters, and has a long-term earnings growth rate of 15%. The company is expected to report results on Mar 9.

We also suggest investing in BJ's Restaurants, Inc. BJRI, which carries a Zacks Rank #2 and an Earnings ESP of +2.56%. The current Zacks Consensus Estimate for the fourth quarter of 2015 is pegged at 39 cents, reflecting a year-over-year increase of about 24.5%. The Huntington Beach, CA-based company delivered an average positive earnings surprise of 30.6% over the trailing four quarters. This operator of casual dining restaurants, which is expected to announce results on Feb 17, has a long-term earnings growth rate of 20.1%.

Investors can also count on The Home Depot, Inc. HD, a home improvement retailer, with a Zacks Rank #2 and an Earnings ESP of +0.91%. The current Zacks Consensus Estimate for the fourth quarter of fiscal 2015 stands at $1.10, reflecting 9.7% growth from the year-ago period. This Atlanta, GA-based company registered an average positive earnings surprise of 4% over the trailing four quarters, and has a long-term earnings growth rate of 14.2%. The company is expected to report results on Feb 23.

Last but not the least is Red Robin Gourmet Burgers Inc. RRGB, with a Zacks Rank #3 and an Earnings ESP of +13.89%. The current Zacks Consensus Estimate for the fourth quarter of 2015 stands at 72 cents, portraying 9.1% growth from the prior-year quarter. Based in Greenwood Village, CO, the company delivered an average positive earnings surprise of 8.2% over the trailing four quarters, and has a long-term earnings growth rate of 11.3%. The company plans to report financial numbers on Feb 12.

Looking Beyond

The holiday season definitely did not live up to expectations. However, that does not mean that the retail sector is devoid of potential. There are stocks that are competent enough to outperform and beat earnings estimates, and hence deserve a place in your portfolio. You can use the Zacks Stock Screener to find other stocks with this winning combination.

The earnings season separates the wheat from the chaff. These stocks, by virtue of their favorable Zacks Rank, positive earnings ESP, healthy fundamentals and growth prospects, are likely to come out with flying colors.

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
 
ZUMIEZ INC (ZUMZ): Free Stock Analysis Report
 
GAP INC (GPS): Free Stock Analysis Report
 
EXPRESS INC (EXPR): Free Stock Analysis Report
 
BJ'S RESTAURANT (BJRI): Free Stock Analysis Report
 
RED ROBIN GOURM (RRGB): Free Stock Analysis Report
 
MACYS INC (M): Free Stock Analysis Report
 
PENNEY (JC) INC (JCP): Free Stock Analysis Report
 
L BRANDS INC (LB): Free Stock Analysis Report
 
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Zacks Investment Research