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5 Retail Stocks to Win Over Investors in Q1 Earnings Season


With the books closed for the first quarter of 2016, investors are waiting for the earnings releases to evaluate the performance of the companies in their portfolio. This is also the time to reshuffle stocks by picking or dropping those that suit one’s portfolio the best.
 
Among all the sectors, one that always remains in business is retail as it is linked directly to consumers and their propensity to spend. Soft comparable store sales (comps) data for the first three months of 2016 (January to March) from various retailers indicate that most of them succumbed to a slow start to 2016.
 
The key factor that plagued comps for January through mid February was an unseasonably warm weather that weakened demand for winter wear and gears. Also, the surging U.S. dollar discouraged foreign tourists from spending more. While weather improved with the onset of the spring season, results for March were hurt by a shift in the Easter Sunday holiday to March-end this year from April last year.
 
Despite these odds, the prospects of the retail sector look promising as it is positioned to gain from an improving U.S. economy, which is highlighted by an increase in gross domestic product (up 1.4%), a favorable job scenario (unemployment rate up 5% in March), income growth, heightened consumer confidence and momentum in the housing market.
 
That said, we bring to you five retail stocks that may show promise based on their favorable Zacks Rank – Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) – and a positive Earnings ESP. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%. It makes sense to add these potential winners to your portfolio ahead of their releases. A rational investment can fetch higher returns on the heels of an earnings beat.
 
Our Picks
 
The five stocks mentioned below not only meet the prescribed criteria but have also convincingly beaten earnings estimates in the trailing four quarters. They hold excellent prospects and are therefore well positioned for future earnings growth.
 
AutoNation Inc. (AN), the largest automotive retailer in the U.S., is a solid bet. The stock carries a Zacks Rank #2 and has an Earnings ESP of +1.09%. The current Zacks Consensus Estimate for the first quarter of 2016 ended Mar 31, 2016 stands at 92 cents. This Fort Lauderdale, FL based company delivered an average positive earnings surprise of 0.5% over the trailing four quarters, and has a long-term earnings growth rate of 13.2%. The company is expected to report results on Apr 22.
 
We also suggest investing in McDonald's Corp. (MCD), a leading fast-food chain that currently operates over 36,000 restaurants in more than 100 countries. The stock currently holds a Zacks Rank #2, along with a long-term earnings growth rate of 9% and an Earnings ESP of +1.74%. The current Zacks Consensus Estimate for first-quarter 2016 stands at $1.17, reflecting 4.8% growth from the year-ago period. This Oak Brook, IL-based company delivered an average earnings beat of 5.4% over the trailing four quarters. The company is slated to report results on Apr 22.
 
Investors can also count on ULTA Salon, Cosmetics & Fragrance Inc. (ULTA), a specialty retailer offering cosmetics, fragrance, haircare, skincare, bath and body products, and salon styling tools in the U.S., with a Zacks Rank #1 and an Earnings ESP of +0.78%. The current Zacks Consensus Estimate for first-quarter fiscal 2016 stands at $1.29 per share, reflecting 24.4% growth from the year-ago period. This Bolingbrook, IL based company registered an average positive earnings surprise of 7.7% over the trailing four quarters, and has a long-term earnings growth rate of 19.5%. The company is expected to report results on May 26.
 
Urban Outfitters Inc. (URBN), a lifestyle specialty retailer that offers fashion apparel and accessories, footwear, home décor and gifts products, with a Zacks Rank #2 and an Earnings ESP of +8.00%, is also a good bet. The current Zacks Consensus Estimate for the first quarter of fiscal 2016 stands at 25 cents per share, reflecting 1.7% growth from the year-ago period. This Philadelphia, PA based company registered an average positive earnings surprise of 5% over the trailing three quarters, and has a long-term earnings growth rate of 15.2%. The company is expected to report results on May 16.
 
Last but not the least is Lithia Motors Inc. (LAD), one of the leading automotive retailers of new and used vehicles, and related services in the U.S., with a Zacks Rank #2 and an earnings ESP of +0.65%. The current Zacks Consensus Estimate for first-quarter 2016 is pegged at $1.54 a share, representing growth of 10.5% year over year. This Medford, OR based retailer registered an average positive earnings surprise of 11% over the trailing four quarters, and has a long-term earnings growth rate of nearly 22%. The company is scheduled to report results on Apr 21.
 
Bottom Line
 
We believe that the above stocks with strong fundamentals and growth prospects are capable of meeting investors’ expectations. Your portfolio’s chance of giving you higher returns increases if you have a favorably ranked stock powered by the optimism of an earnings beat in the upcoming release.
 
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
 
AUTONATION INC (AN): Free Stock Analysis Report
 
MCDONALDS CORP (MCD): Free Stock Analysis Report
 
ULTA SALON COSM (ULTA): Free Stock Analysis Report
 
URBAN OUTFITTER (URBN): Free Stock Analysis Report
 
LITHIA MOTORS (LAD): Free Stock Analysis Report
 
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