Retail Sales Rise Again: A Sector To Bet On In '18?

U.S. retail sales rose for the fourth straight month in December, as people continued the shopping spree. The Commerce Department stated that U.S. retail and food services sales for the final month of 2017 increased 0.4% to $495.4 billion following a revised upward reading of 0.9% growth registered in November. This shows that consumer spending — one of the pivotal factors driving the economy — remains strong during the holiday season.

Analysts believe that a buoyant stock market, gradual wage acceleration, improved employment picture, rising consumer confidence and modest inflation were enough to trigger consumer spending. Per National Retail Federation, retail sales during the November/December period increased 5.5% to $691.9 billion. It's quite evident that retailers are the end gainers, as they try to make the most of the season that accounts for a sizeable chunk of yearly revenues and profits.

But does the sector promises a safe bet for 2018? Let’s analyze.

Favorable Sector Rank

Definitely, the above sales data and economic indicators signals that the "retail apocalypse” is now a thing of past. The sector has certainly been bearing the brunt of heightened online competition, lower footfall and changing consumer spending patterns but of late the tables are turning in favor of the retailers. Stocks once bogged down by tough environment are now suddenly climbing the charts.

The sector, which currently occupies the top 13% (2 out of 16) position in the list of 16 Zacks categorized sectors, has advanced roughly 35% in a year and comfortably outperformed the S&P 500’s growth of approximately 23%. Moreover, according to the latest Earnings Trends report, the sector is expected to record top and bottom-line growth of 6.3% and 12%, respectively, in 2018.

Tax Reform May Leave Surplus Money in Hand

The latest tax reform that has resulted in the corporate tax rate being lowered to as much as 21%, and retailers will benefit from the same. Analysts believe that a lower tax burden is likely to allow them to channelize the surplus money to best possible options.

They may go for a dividend hike, or reduce debt load, or create a corpus to fund acquisitions, or invest in enhancing omni-channel capabilities, new product launches and any other innovations. Further, any individual tax cut would pave way for higher disposable income, which may trigger demand for discretionary items.

Retailers Fast Adapting to Changing Spending Pattern

Retail is no more restricted to brick-&-mortar presence. The major reason behind today’s ultra-competitive retail environment is because of the e-commerce giant, Amazon.com (NASDAQ:AMZN) . This Zacks Rank #3 (Hold) company is aggressively making headway into retail space be it grocery, books, clothes and accessories or electronics, you name it and you have it. To tackle the growing Amazon dominance, Wal-Mart (NYSE:WMT) is striving hard to give itself a complete makeover — including buyouts, alliances, and improved delivery and payment systems.

Evidently, Walmart’s buyouts of Bonobos, ShoeBuy, Moosejaw, ModCloth and Jet.com underscore its quest to build an impressive digital brand portfolio. Its Walmart Pay mobile payment system and Mobile Express Returns program further highlight its focus on accelerating online business. Further, to fortify position in online grocery business, this Zacks Rank #3 company acquired a delivery start-up Parcel, Inc., which specializes in same-day delivery.

Costco (NASDAQ:COST) , which carries Zacks Rank #3, is also gradually expanding e-commerce capabilities in the United States, Canada, UK, Mexico, Korea and Taiwan. The company’s growth strategies, sturdy comparable-store sales performance, strong membership trends and higher penetration of Citi Visa co-brand card program are the pillars that reinforce its position.

Target (NYSE:TGT) has taken steps that have improved prospects in a big way. These include development of omni-channel capacities, diversification and localization of assortments along with emphasis on flexible format stores. It has also rolled out Target Restock program that allows customers to restock their shipping box with essential items online and get them delivered at door steps.

Further, in order to improve supply chain and expand delivery capabilities, the company had acquired Grand Junction. This Zacks Rank #3 also acquired internet-based grocery delivery service Shipt to sharpen its same-day delivery services.

Macy’s (NYSE:M) also has announced a slew of measures revolving around stores closures, cost containment, real estate strategy and investment in omni-channel capabilities to enhance sales, profitability and cash flows. Additionally, management is developing e-commerce business, Macy’s Backstage off-price business along with expanding Bluemercury and online order fulfillment centers. The stock carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

From above it is quite apparent that the sector does hold promise in 2018 but it is also true that it will not be an easy ride for them.

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