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5 Retail Stocks Poised to Beat Estimates in Q1 Earnings Season

With first-quarter 2017 earnings season drawing to a close, investors are busy evaluating the performance of the companies in their portfolio. This is also a time when investors reshuffle stocks by picking or dropping those that suit one’s risk appetite 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. Recent comparable store sales (comps) data provided by retailers gives a mixed view for the first three months of 2017 (January to March). While retailers continue to bear the brunt of the current challenging retail environment due to sluggish mall traffic, volatile consumer spending and macroeconomic volatility, some stand to gain from growth initiatives and cost control measures.

Despite the odds, the future prospects of the retail sector look promising as it is positioned to gain from the improving U.S. economy, which is highlighted by an increase in gross domestic product (up 0.7%) for first-quarter 2017, a favorable job scenario (unemployment rate down to 4.4% in April), income growth, heightened consumer confidence and momentum in the housing market.

Coming to the first-quarter earnings reporting cycle, which is nearing its end, we have only 18% of S&P 500 members still to report results. At this stage, retail is the only sector that has sizable reports still to come. The trend, so far, for the sector looks enticing as total earnings are up 2.9% year over year, on 5.3% revenue growth. Moreover, the beat ratios are positive with 61.1% in earnings beat and 66.7% in revenue beat, making for a blended beat ratio of 55.6%.

Further, the overall first-quarter 2017 earnings reason has been very good. We note that the S&P 500 members recorded very strong growth in the quarter, while also marking the highest growth in many years. Notably, majority of the companies reported positive surprises, particularly on the revenues front.

As of May 5, 2017, about 412 S&P 500 members reported earnings that together accounted for 85.7% of the index’s total market capitalization. Total earnings for these companies were up 14.2%, on 7.3% revenue growth. Further, about 73.3% delivered positive earnings surprises while nearly 67.7% beat revenue estimates, making for a blended beat ratio of 52.9%.

The real picture of the trend so far is visible from our latest Earnings Previewreport published on Jul 29. 

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

We have highlighted five stocks that not only meet the prescribed criteria but have also convincingly beaten earnings estimates in the trailing four quarters, hold excellent prospects and are therefore well positioned for future earnings growth.

Best buy Co. Inc. (BBY), a multinational specialty retailer of consumer electronics, home office products, entertainment software, appliances and related services, is a solid bet. The stock carries a Zacks Rank #2 and has an Earnings ESP of +12.50%. You may uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

The current Zacks Consensus Estimate for first-quarter fiscal 2017 stands at 40 cents, reflecting an uptrend in the last 30 days. This Richfield, MN-based company delivered an average positive earnings surprise of 27.7% in the trailing four quarters, and has a long-term earnings growth rate of 10.8%. The company is scheduled to report results on May 25.

We also suggest investing in Home Depot Inc. (HD), the world’s largest home improvement specialty retailer based on net sales, offering a diverse range of branded and proprietary home improvement items, building materials, lawn and garden products, and related services. It has a Zacks Rank #2, a long-term earnings growth rate of 12.7% and an Earnings ESP of +1.24%. The current Zacks Consensus Estimate for first-quarter fiscal 2017 is pegged at $1.61 per share, reflecting an 11.7% growth from the prior-year quarter. This Atlanta, GA-based company delivered an average positive earnings beat of nearly 4.4% in the trailing four quarters. The company is expected to report results on May 16.

Investors can also count on Wal-Mart Stores Inc. (WMT), the operator of retail stores, restaurants, discount stores, supermarkets, supercenters, hypermarkets, warehouse clubs, apparel stores, Sam’s Clubs, and Neighborhood Markets, as well as the websites – walmart.com and samsclub.com. The company has a Zacks Rank #2 and an Earnings ESP of +1.04%. The current Zacks Consensus Estimate for first-quarter fiscal 2018 is pegged at 96 cents. This Bentonville, AR-based company registered an average positive earnings surprise of 4.8% in the preceding four quarters, and has a long-term earnings growth rate of 6.1%. The company is set to report results on May 18.

Jack in the Box Inc. (JACK), is a restaurant company that operates and franchises Jack in the Box restaurants also holds promise, carrying a Zacks Rank #3 and an Earnings ESP of +4.40%. The current Zacks Consensus Estimate for second-quarter fiscal 2017 is pegged at 91 cents, reflecting 7.2% growth from the year-ago period. This San Diego, CA-based company registered average positive earnings surprise of 14.1% the trailing four quarters, and has a long-term earnings growth rate of 14.2%. The company is slated to report results on May 16.
 
Last but not the least is DICK’S Sporting Goods Inc. (DKS), with a Zacks Rank #3 and an Earnings ESP of +1.85%. The current Zacks Consensus Estimate for first-quarter fiscal 2017 is pegged at 54 cents a share, reflecting a 7.4% growth year over year. This Coraopolis, PA-based full-line sporting goods retailer offers athletic shoes, apparel, accessories and a broad selection of outdoor and athletic equipment for team sports, fitness, camping, hunting, fishing, tennis, golf, water sports, to name a few.  The company registered an average positive earnings surprise of nearly 9.8% in the trailing four quarters, and has a long-term earnings growth rate of 13%. The company is scheduled to report results on May 16.
 
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 earnings beat in the upcoming quarter.

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Home Depot, Inc. (The) (HD): Free Stock Analysis Report
 
Best Buy Co., Inc. (BBY): Free Stock Analysis Report
 
Wal-Mart Stores, Inc. (WMT): Free Stock Analysis Report
 
Jack In The Box Inc. (JACK): Free Stock Analysis Report
 
Dick's Sporting Goods Inc (DKS): Free Stock Analysis Report
 
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