Why COST, ROST, DLTR Are Likely To Trump Earnings Estimates

While most sectors are in the last leg of the earnings season, the main show is left for the Retail-Wholesale sector, which occupies the top 13% (2 out of 16) position in the list of Zacks sectors. Per the report, the sector is expected to record top and bottom-line growth of 9% and 7.3%, respectively, this earnings season.

Gradual wage acceleration, a 17-year low unemployment rate and rising consumer sentiment are working in tandem for the sector. Additionally, the recent cut in corporate tax rate will allow retailers to channelize the surplus money toward best possible alternatives.

Further, an individual tax cut would pave way for higher disposable income, which may trigger demand for discretionary items. For obvious reasons, retailers are the end gainers.

Certainly, the sector has borne the brunt of heightened online competition, lower footfall and changing consumer spending patterns but retailers have left no stone unturned to rapidly adapt to the changing retail landscape. Rise in online shopping prompted retailers to rapidly adopt the omni-channel mantra to provide a seamless shopping experience, whether online or in-stores.

Our today’s article revolves around three discount store retailers — Costco (NASDAQ:COST) , Dollar Tree (NASDAQ:DLTR) , Ross Stores (NASDAQ:ROST) . We note that the retail-discount industry, which occupies the top 9% (22 out of the 256) position, has rallied approximately 25.2% in six months comfortably outperforming the S&P 500’s growth of roughly 12.7%.

So, let’s find out what’s special about these three discount retailers.

These three discounters are likely to trump estimates, given a favorable combination of positive Earnings ESP and Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). Our research shows that for stocks with such combination, the chance of a positive earnings surprise is as high as 70%.

Moreover, these stocks also look well poised to register year-over-year growth in both top and bottom lines. You can see the complete list of today’s Zacks #1 Rank stocks here.

Let’s analyze them.

Which Factors Hold Key to Costco’s Performance?

Costco, the operator of membership warehouses, is scheduled to come up with second-quarter fiscal 2018 financial results on Mar 7. The Zacks Consensus Estimate for the quarter is pegged at $1.45, reflecting year-over-year increase of roughly 24%. Analysts polled by Zacks expect revenue of $32.7 billion, up about 10% from the prior-year quarter.

Moreover, the stock holds a favorable combination of Zacks Rank #3 and an Earnings ESP of +4.61%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Costco seems somewhat unfazed by tough retail scenario. 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.

The company’s strategy to sell products at heavily discounted prices has helped it to remain on growth track. We are also encouraged by the company’s expansion strategy, as it remains committed to opening new clubs and expanding e-commerce capabilities.

What Will Drive Dollar Tree’s Results?

Dollar Tree, which is expected to report fourth-quarter fiscal 2017 results on Mar 7, is a solid bet. The Zacks Consensus Estimate for the quarter is pegged at $1.89, reflecting an increase of approximately 36%. Revenue is expected to come in at $6,393 million, up 13.5% from the year-ago period. This operator of discount variety stores has a Zacks Rank #2 and an Earnings ESP of +1.95%.

Dollar Tree has been somewhat resilient to competitive retail environment, as evident from its robust surprise trend accompanied by strong comparable store sales and improved margins. Further, the company is benefiting from the integration of Family Dollar. The company is also concentrating on expanding its store base, including remodeling and relocations and incorporating technological advancements.

Why Ross May Trump Estimates?

Ross Stores, an off-price retailer of apparel and home accessories, is expected to announce fourth-quarter fiscal 2017 numbers on Mar 6. The stock has a Zacks Rank #2 and an Earnings ESP of +1.37%. The Zacks Consensus Estimate for the quarter is at 93 cents, reflecting an increase of 20.8% year over year. Revenue is expected to come in at $3,953 million, up 12.6% from the year-ago period.

Ross Stores commitment toward better price management, merchandise, cost containment and store expansion plan have been aiding its quarterly performance. The company’s proven off-price business model along with competitive bargains continues to make its stores an attractive destination for customers.

Additionally, the company has been committed toward improving merchandise assortments in the ladies’ apparel business in order to boost the top line. These factors collectively underscore the company’s solid potential.

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