As we find ourselves at the peak of the earnings season, a significant portion of releases from the Retail-Wholesale sector still awaits. This reporting cycle, a glimpse into the sector’s performance reveals a likely modest acceleration in both sales and earnings. The outcomes are poised to be shaped by prevailing consumer sentiments, spending trends and the pressing challenge of rising input costs.

Factors at Play

Undeniably, the industry’s prospects are correlated with the purchasing power of consumers. Consumer spending, a key catalyst for the economy, has shown signs of slowing down. Several factors have come into play, including underlying inflationary pressure, a higher interest rate environment and reductions in pandemic savings.

We note that U.S. retail sales experienced a slight increase in June 2023, albeit falling short of analysts’ predictions. Retail sales showed 0.2% growth, marking a deceleration from the 0.5% growth recorded in May. Nonetheless, this upturn in sales serves as a testament to the resilience demonstrated by consumers. Furthermore, continued wage gains, coupled with the abatement of inflationary pressures from the peak, have provided much-needed impetus to the retail industry.

No doubt, inflation has been a subject of concern across various sectors, including retail. Rising cost pressures, the tight labor market and higher promotional activities have put margins in the spotlight. This has spurred retailers into action, re-engaging with their customer base, recalibrating pricing strategies, refreshing product assortments and identifying opportunities to curtail costs.

Also, companies have been undertaking a more consumer-centric approach — emphasizing membership programs, upgrading store technology, shopping via the mobile app and last-mile delivery solutions. Expedited delivery services like doorstep delivery, curbside pickup or buy online and pick up at store, as well as contactless payment solutions, have been aiding in maximizing the share of customers’ wallets.

Per the latest Zacks Earnings Preview, the sector is anticipated to have witnessed top-line growth of 4.1% year over year in the second quarter of 2023. This follows a 5.5% increase in the preceding season. Meanwhile, the bottom line is expected to have increased 6.1% this earnings season. The sector registered earnings growth of 2.9% in the previous reporting cycle.

Making the Perfect Choice

With the earnings season in full swing, it is worthwhile to invest in companies with earnings beat potential. A stock generally rallies on an earnings beat.

Our research shows that for stocks with the combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold), the chance of a positive earnings surprise is as high as 70%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

We have identified four stocks — The TJX Companies, Inc. TJX, Urban Outfitters, Inc. URBN, Five Below, Inc. FIVE, and Costco Wholesale Corporation COST — that are poised to trump earnings estimates this season.

4 Prominent Picks

The TJX Companies, with a Zacks Rank #2 and an Earnings ESP of +2.63%, is worth betting on. Over the past 30 days, the Zacks Consensus Estimate for second-quarter fiscal 2024 earnings per share has been stable at 76 cents, suggesting an increase of 10.1% from the year-ago quarter. This leading off-price retailer of apparel and home fashions has a trailing four-quarter earnings surprise of 4.4%, on average.

This Framingham, MA-based company’s flexible off-price business model, store expansion strategies, strong vendor relationship and the availability of branded merchandise provide tremendous opportunities to drive sales and traffic. With a successful “treasure hunt” shopping experience, The TJX Companies attracts bargain hunters seeking high-quality products at a fraction of regular retail prices. TJX is scheduled to report financial numbers on Aug 16 before market open.

Investors can count on Urban Outfitters with a Zacks Rank #2 and an Earnings ESP of +2.27%. The Zacks Consensus Estimate for second-quarter fiscal 2024 earnings per share has risen by 3.5% to 88 cents in the past 30 days. The consensus estimate suggests an increase of 37.5% from the year-ago period. URBN has a trailing four-quarter earnings surprise of 12.2%, on average.

This leading lifestyle product and service company seems a promising bet due to its solid business strategies and sound fundamentals. Management has been strengthening its direct-to-consumer business, enhancing productivity across existing channels and optimizing inventory levels. URBN’s strategic growth initiative, FP Movement and store-growth endeavors are also impressive. The company is scheduled to report financial numbers on Aug 22 after market close.

You may consider Five Below, which has a Zacks Rank #3 and an Earnings ESP of +1.43%. Over the past 30 days, the Zacks Consensus Estimate for second-quarter fiscal 2023 earnings per share has been stable at 83 cents, calling for an increase of 12.2% from the year-ago quarter. This extreme-value retailer for tweens, teens and beyond has a trailing four-quarter earnings surprise of 27.9%, on average.

Five Below’s focus on providing trend-right products, improving the supply chain, strengthening digital capabilities and growing its brick-and-mortar footprint bodes well. The company is known for its impressive range of merchandise, per evolving consumer trends. These factors, combined with its pricing strategy, enable it to cater to demographic shoppers and resonate with value-seeking customers.

Costco also deserves mention. The stock has a Zacks Rank #3 and an Earnings ESP of +1.08%. The Zacks Consensus Estimate for its fourth-quarter fiscal 2023 earnings per share is currently pegged at $4.72. The consensus estimate implies an increase of 12.4% from the year-ago period. Costco has a trailing four-quarter earnings surprise of 1.8%, on average.

The discount retailer’s growth strategies, better price management and decent membership trends have been contributing to its performance. Cumulatively, these factors have been aiding this Issaquah, WA-based company in registering decent sales numbers. The company’s distinctive membership business model and pricing power set it apart from traditional players. We believe a favorable product mix, steady store traffic, pricing strength and strong liquidity should benefit Costco. COST is scheduled to report financial numbers on Sep 26 after market close.
The TJX Companies, Inc. (TJX): Free Stock Analysis Report

Costco Wholesale Corporation (COST): Free Stock Analysis Report

Urban Outfitters, Inc. (URBN): Free Stock Analysis Report

Five Below, Inc. (FIVE): Free Stock Analysis Report

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