The first quarter earnings season was a mixed one for the retail sector. While it started well with restaurateurs and online operators reporting encouraging results, financial reports of the department stores and big-box retailers ended up disappointing investors.
While we did see positive results from a few major players like Home Depot (NYSE:HD) and Target Corp. (NYSE:TGT), sector bellwethers like Wal-Mart Stores (NYSE:WMT) and Macy's (NYSE:M) fell short of expectations. Nordstrom Inc. (NYSE:JWN), HHGregg (NYSE:HGG) and Lumber Liquidators Holdings (NYSE:LL) also posted disappointing results.
However, the challenges for Wal-Mart are far more serious. Even though the retail giant is now delivering improved comps at Walmart U.S. and Sam’s Club after posting quarters of weak comps, the company remains under pressure, as it anticipates huge expenses over the near term.
Wal-Mart has committed to spend around $1 billion to raise wages of approximately 500,000 full-time and part-time associates at Wal-Mart U.S. stores and Sam's Clubs in the first half of fiscal 2016. Also, in order to compete with online retailers like Amazon.com (NASDAQ:AMZN), the company has been making huge investments in the e-commerce business. This in turn will hurt profit margin in the upcoming quarters owing to higher shipping costs and price competition involved in it.
The company is already burdened with increased health care costs due to medical cost inflation and increasing health care enrollments in the U.S. Currency is also expected to take a toll on its earnings.
However, there were retailers which managed to beat expectations and outperform Wal-Mart in every aspect in spite of a competitive environment, West Coast port unrest, ongoing currency headwinds and unfavorable weather conditions early in the quarter.
Three Retail Stocks Which Outperformed Wal-Mart
Here, we have identified three stocks with an impressive Zacks Rank, long-term EPS growth rate of above 10% and Value or Growth Style Score of ‘A’ or ‘B’ with the help of our new style score system, that have excellent prospects and might prove to be profitable for long-term investors.
Jack In The Box (NASDAQ:JACK) is a Zacks Rank #2 (Buy) stock with a Growth Score of ‘A’. This San Diego, CA-based quick-service restaurant operator has a long-term earnings growth rate of 16.4% and has registered positive earnings surprises in the last four consecutive quarters, with an average positive surprise of 6.85%.
System wide same-store sales for the company have been outperforming the industry consistently over the past few quarters. Menu innovation backed by correct pricing strategy and double-digit growth in catering sales are the driving factors.
Pittsburgh, PA-based American Eagle Outfitters (NYSE:AEO) is a specialty retailer of clothing, accessories, and personal care products. The company sports a Zacks Rank #1 (Strong Buy) and possesses a Value and a Growth Score of ‘A’. The company registered an average positive earnings surprise of 2.94% over the trailing four quarters and has a long-term earnings growth rate of 11.7%.
American Eagle shares have climbed 13% year-to-date. We believe the company is gaining from its international expansion plans. Moreover, its omni-channel growth provides it with a significant opportunity to expand its business and cater to the incredible global demand for its products.
CVS Health Corp. (NYSE:CVS), a Zacks Rank #2 stock, has a Growth and Value Score of ‘B’. This Woonsocket, RI-based provider of integrated pharmacy health care services in the U.S. has succeeded in delivering superior health care services to people and registered an average positive earnings surprise of 2.29% over the trailing four quarters. The company has a long-term earnings growth rate of 13.54%.
Our Take
This year looks promising for retailers as stock prices gain momentum, the employment picture improves and consumer confidence increases. All these should help retail stocks take center stage.