5 Promising Retail Stocks Poised for Earnings Beat This Season

After a dismal holiday season, retailers are yet to regain confidence this year with the slowing global economy, the stronger U.S. dollar, lower traffic and weakness in oil and other commodity sectors. These factors have been affecting the results of most retailers over the past few quarters.
 
Further, the retail sector on the whole succumbed to a slow start to 2016 as was evident from January comparable store sales (comps) that fell short of expectations. Apart from the headwinds already at work, January comps suffered due to a warmer-than-normal weather in the first few weeks of the month. Though weather improved later in the month, retailers with their fourth quarter ending January 31, 2016, expect a considerable weather-related impact along with dismal holiday sales numbers to show up on Q4 results.
 
Despite the odds, the future prospects of the retail sector look promising as it is positioned to gain from the improving U.S. economy, which highlight a favorable job scenario and heightened consumer confidence. The advance estimate for gross domestic product (GDP), released by the Bureau of Economic Analysis, is 0.7% for the fourth quarter of 2015. Further, the unemployment rate for Jan 2016 dropped to 4.9% from 5% in Dec 2015.
 
Also, in late January, the Conference Board reported that the consumer confidence index improved moderately last month after a rise in December. The index rose 1.9% to 98.1 in January from the December reading of 96.3.
 
Past mid-February, the Q4 earnings season is almost complete across most sectors. But, we still have nearly 50% of the retailers yet to report their Q4 results. The picture so far for the retail sector has not been very pleasing with the majority of retailers suffering earnings declines and narrowing their fiscal 2016 guidance.
 
Amid this dull start to the earnings season, we bring to you five retail stocks that may show promise based on their favorable Zacks Rank – Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) – and a positive Earnings ESP. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%. It makes sense to add these potential winners to your portfolio ahead of their releases. A rational investment can fetch higher returns on the heels of an earnings beat.
Our Picks
 
We have highlighted five stocks that not only meet the prescribed criteria but have also convincingly beaten earnings estimates in the trailing four quarters, hold excellent prospects and are therefore well positioned for future earnings growth.
 
Casey's General Stores Inc. (CASY - Snapshot Report), a convenience store retailer, is a solid bet. The stock flaunts a Zacks Rank #1 and has an Earnings ESP of +10.11%. The current Zacks Consensus Estimate for the third quarter of fiscal 2016 ended Jan 31, 2016 stands at 89 cents. This Ankeny, IA based company delivered an average positive earnings surprise of 27.7% over the trailing four quarters, and has a long-term earnings growth rate of 11.5%. The company is expected to report results on Mar 14.
 
We also suggest investing in Foot Locker Inc. (FL - Analyst Report), a retailer of athletic shoes and apparel, with a Zacks Rank #2, a long-term earnings growth rate of 12.3% and an Earnings ESP of +1.79%. The current Zacks Consensus Estimate for the fourth quarter of fiscal 2015 stands at $1.12, reflecting 12.2% growth from the year-ago period. This New York-based company delivered an average positive earnings beat of 11.2% over the trailing four quarters. The company is slated to report results on Feb 26.

Investors can also count on Target Corp. (TGT - Analyst Report), a discount retailer offering general merchandise, with a Zacks Rank #3 and an Earnings ESP of +1.30%. The current Zacks Consensus Estimate for the fourth quarter of fiscal 2015 stands at $1.54, reflecting 2.7% growth from the year-ago period. This Minneapolis, MN based company registered an average positive earnings surprise of 4.9% over the trailing four quarters, and has a long-term earnings growth rate of 10.8%. The company is scheduled to report results on Feb 24.
 
Autozone Inc. (AZO - Analyst Report), a distributor of automotive replacement parts and accessories, with a Zacks Rank #3 and an Earnings ESP of +0.41%, is also a good bet. The current Zacks Consensus Estimate for the second quarter of fiscal 2016 (ending Feb 13, 2016) stands at $7.26, reflecting 11.5% growth from the year-ago period. This Memphis, TN based company registered an average positive earnings surprise of 13.4% over the trailing four quarters, and has a long-term earnings growth rate of 13%. The company is scheduled to report results on Mar 1.
 
Last but not the least is Zumiez Inc. (ZUMZ - Analyst Report) with a Zacks Rank #3 and an earnings ESP of +2.08%. The current Zacks Consensus Estimate for fourth-quarter fiscal 2015 is pegged at 48 cents a share. This Lynnwood, WA based multi-channel specialty retailer registered an average positive earnings surprise of 6% over the trailing four quarters, and has a long-term earnings growth rate of 15%. The company is expected to report results on Mar 10.
 
Bottom Line
 
We believe that the above stocks with strong fundamentals and growth prospects are capable of meeting investors’ expectations. Your portfolio’s chance of giving you higher returns increases if you have a favorably ranked stock powered by the optimism of an earnings beat in the upcoming quarter.