Retail Sales Fall: Which Way Is The Sector Headed?

U.S. retail sales registered the steepest decline in almost a year during January. The Commerce Department stated that U.S. retail and food services sales were down 0.3% to $492 billion. The fall was primarily due to lower sales at motor vehicle & parts as well as building material dealers. Per media reports, analysts were expecting a 0.2% increase in sales.

Auto sales declined 1.3% in January, according to the monthly report. Furthermore, home building materials sales declined 2.4%. However, the bright spots were gasoline stations, clothing & clothing accessories and department stores where sales increased 1.6%, 1.2% and 0.8%, respectively. Receipts at service stations increased on account higher gasoline prices. Meanwhile, sales at non-store retailers remained flat but increased 10.2% from the prior-year period.

Why Retail Sector Still Hold Promise?

Although January sales data raises concern, industry experts believe that this may be short lived. In fact, they are of the opinion that gradual wage acceleration, a 17-year low unemployment rate and rising consumer confidence are enough to trigger consumer spending, which accounts for more than two-thirds of U.S. economic activity. Also, the monthly report states that retail sales did increase 3.6% year over year.

All these bode well for the Retail-Wholesale sector, which currently occupies the top 13% (2 out of 16) position in the list of 16 Zacks sectors. The sector has advanced roughly 29% in a year, comfortably outperforming the S&P 500’s growth of approximately 14%.

Furthermore, improving labor market, rising disposable income and elevated consumer sentiment have instilled confidence in retailers. With digital transformation in shopping, retailers are fast adopting the omni-channel mantra to provide a seamless shopping experience, whether online or in-stores.

In fact, retail is no more restricted to brick-&-mortar presence. E-commerce giant Amazon (NASDAQ:AMZN) is the major reason for today’s ultra-competitive retail environment. This Zacks Rank #3 (Hold) company is aggressively making headway into the retail space, be it grocery, books, clothes and accessories or electronics.

To keep pace with the changing shopping pattern and environment, Walmart (NYSE:WMT) — a Zacks Rank #2 (Buy) stock — is going the extra mile to give itself a complete makeover through buyouts, alliances, and improved delivery and payment systems. Well, Walmart has been taking numerous initiatives to mar Amazon’s rising prospects. Of late, rumors were making rounds that Walmart is planning to build an inhouse cloud computing platform — a card already played by Amazon. In addition, sources revealed that Walmart’s Sam’s Club is providing free shipping services to premium members. These moves clearly echo the company’s transformation ideals and the shift from Wal-Mart Stores to Walmart bears the biggest testimony to its efforts to keep pace with consumers’ changing preferences. The big box retailer’s various buyouts, alliances, focus on expanding online grocery, and improved delivery and payment systems reflect the same.

Other retailers such as Costco (NASDAQ:COST) , Target (NYSE:TGT) and Macy's (NYSE:M) are focusing on omni-channel capabilities as well.

Costco — a Zacks Rank #3 stock — is expanding e-commerce capabilities in the United States, Canada, the U.K., Mexico, Korea and Taiwan.

Macy’s — a Zacks Rank #2 company — has also 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.

Meanwhile, Target is focusing on omni-channel capacities, diversification and localization of assortments along with emphasis on flexible format stores. Notably, the company has a Restock program, which allows customers to restock their shipping box with essential items online and get them delivered at the door step by the next business day for a nominal charge. The company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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