Here's How Shopping Trends Have Helped Retail Stocks Lately

Despite a sluggish start to the year, retail stocks have, more the most part, bounced back thanks to a relatively strong earnings season. While some companies failed to keep up, department stores like Macy’s (NYSE:M) , JCPenney (NYSE:JCP) , Dillard’s (NYSE:DDS) , and Kohl’s (NYSE:KSS) , as well as specialty retailers like Foot Locker (NYSE:FL) , Urban Outfitters (NASDAQ:URBN) , and Tilly’s (NYSE:TLYS) posted encouraging results by cashing in on the latest shopping trends.

What Shoppers Want

Throughout the retail landscape, we are seeing shoppers respond well to revamped e-commerce and freshly polished physical stores. The retail companies that have performed well this earnings season were able to hone in on one, if not both, of these areas this quarter.

Let’s take Macy’s as an example. This staple of American shopping malls posted earnings of 54 cents per share, beating the Zacks Consensus Estimate of 40 cents per share. The company also beat revenue expectations, posting sales of $5.866 billion versus our consensus estimate of $5.749 billion. So what did Macy’s CEO Terry J. Lundgren credit for the success? Well, among other things, Lundgren pointed to several in-store improvement.

“[Our new sales-driving initiatives] include additional investments in store staffing and visual presentation, the rollout of our enhanced fine jewelry departments, athletic/active apparel intensification, home store improvements and Last Act clearance strategy,” he said.

On a smaller scale, retailers like Foot Locker were able to post strong results after by ensuring that stores were stocked with the latest trends in fashion. After an earnings and revenue double-beat, Foot Locker CEO Richard Johnson pointed to the quality of the company’s shoes and apparel:

“[We share an understanding] with our key vendors, which enables us to partner with them to deliver the trend-right, premium footwear and apparel assortments our customers seek, which in turn has led to consistently outstanding financial results such as we announced today,” Johnson said.

This earnings season proved that shoppers are willing to spend money, so long as it is at the right place. Throughout the quarter, we’ve seen that the better that companies were able to listen to customers, follow trends, and improve in-store and online offerings, the better the company performed compared to others who fell behind.

“For the past few years, we have worked to lift our brands through merchandise leadership and innovation, strengthen our customer focus and invest in technology,” said American Eagle CEO Jay Schottenstein after his company posted earnings and revenue which both beat the respective Zacks Consensus Estimate.

Tilly’s, a current Zacks Rank #1 (Strong Buy) was also able to post a double-beat, turning a surprise profit on the back of 1% comps growth, which included its e-commerce business.

And while these companies primarily operate in shopping malls, other big retailers saw success in the same areas. Walmart (NYSE:WMT) , for example, has invested several billion dollars into the improvement of its e-commerce business over the past several years, and this quarter the company saw U.S. same-store sales gain 1.6%, which was backed by a positive impact from e-commerce sales.

Bottom Line

After the first quarter, the retail sector was looking like it could be one of the worst performers of 2016. However, a range of positive Q2 reports and impressive company strategies have helped the sector recover. The Regional Department Stores business falls into the Top 8% of the Zacks Industry Rank right now, and the Apparel and Shoes category falls into the Top 33%.

These two categories are seeing strong Zacks Ranks because they are comprised of companies that have cashed in on the latest trends in fashion and shopper behavior. Even in the Supermarket industry, which falls in the Bottom 7% of the Zacks Industry Rank, some positive signs were shown by companies that have invested in what customers want, such as Walmart’s e-commerce initiatives.

Right now, it looks like shoppers have money to spend at businesses that offer the latest, “coolest” options both in-store and online.