Cheap gasoline and a better job picture failed to perk up June retail sales, leaving investors perplexed. So what happened?

Even as increased consumer confidence charged up the retail space, cash registers weren't jingling much. Retailers witnessed an unexpected drop in sales during the month of June, clearly indicating that consumers are exercising caution when it comes to spending.

Data compiled by the Commerce Department revealed that retail sales dropped 0.3% in June to $442 billion – the first drop since February, when adverse weather locked consumers indoors – and missed analysts’ forecast of a 0.2% jump by miles. The dismal results followed a 1% increase in May that also was revised down from 1.2% growth originally reported. Consumers put purchases on car, home or even apparel on hold, and preferred to dine out less.

What Are Investors Afraid Of?

So far, the year has not been an exciting one for retailers, who have borne the brunt of inclement weather, a West Coast ports disruption as well as a strong dollar. The weak June sales number is the latest in this string. And a disappointing back-to-school season sales forecast has aggravated retailers further.

According to the National Retail Federation, total spending in back-to-school and back-to-college season – the busiest sales season for the U.S. retailing companies just next to Christmas holidays – is estimated to touch $68 billion, down approximately 9% from $74.9 billion anticipated last year. This could prove a major setback for retailers, who are betting hard on the season to lift their sales figures.

Market pundits are busy number crunching to find out the implication of the subdued June sales and soft back-to-school sales projection. Economists are of the view that the underlying tone may compel the Federal Reserve to revisit its decision of a rate hike, now expected in September. Moreover, they also warn that weaker-than-expected data could thwart economic growth, and ultimately restrain consumers from spending freely. Undoubtedly, the victims will be the retailers.

Other Economic Metrics Show Ray of Hope

The grass is definitely greener on the other side. According to a recent Conference Board data, the Consumer Confidence Index increased to 101.4 in June from the May reading of 94.6. A gradual recovery in the housing market as well as the manufacturing sector coupled with an improving labor market played a major role in lifting buyers’ confidence. These indicate that the economy is gaining traction. We expect the positive sentiment to push up consumer spending, which accounts for over two-thirds of U.S. economic activity.

The economy is sending out signals of growth driven by lower oil prices and an improving employment picture. According to the recent data from the Bureau of Labor Statistics, the unemployment rate for June has declined to 5.3% from 5.5% in May and is at its lowest level since Sep 2008. On the other hand, total nonfarm payroll employment increased by 223,000 last month, reflecting improved employment prospects.

It is quite apparent that the current earnings season is characterized by a number of events and is baffling investors. Here the Zacks’ formula of a profitable mix comes into play, helping investors to identify stocks that have the potential to be market winners. This increases the likelihood of higher returns even when market conditions are not congenial.

5 Prominent Picks

Our research shows that for the stocks with this combination, the chance of a positive earnings surprise is as high as 70%. A favorable rank indicates positive estimate revisions by analysts optimistic on the future performance of companies. Moreover, Earnings ESP is our proprietary methodology for identifying stocks that have the best chance of surprising with their next earnings announcement.

G-III Apparel Group, Ltd. (GIII - Snapshot Report), manufacturer and marketer of women’s and men’s apparel, is a solid bet. The stock sports a Zacks Rank #1 and has an Earnings ESP of +5.00%. The current Zacks Consensus Estimate for the second quarter of fiscal 2016 stands at 20 cents a share, portraying roughly 41% growth from the prior-year quarter. Based in New York, G-III Apparel delivered an average positive earnings surprise of 53.8% over the trailing four quarters, and has a long-term earnings growth rate of 18.5%. The company is expected to report results on Sep 2.

We also suggest investing in Red Robin Gourmet Burgers Inc. (RRGB - Analyst Report), which carries a Zacks Rank #2 and has an Earnings ESP of +4.00%. The current Zacks Consensus Estimate for the second quarter of 2015 stands at 75 cents a share, reflecting 9.7% growth from the prior-year quarter. This Greenwood Village, CO-based casual dining and fast-casual restaurant operator, registered an average positive earnings surprise of 11.9% over the trailing four quarters, and has a long-term earnings growth rate of 11.3%. The company is expected to report results on Aug 13.

Lithia Motors Inc. (LAD - Analyst Report), which operates as an automotive franchisee and retailer of new and used vehicles, is another solid bet. The stock holds a Zacks Rank #2, and has a long-term earnings growth rate of 22.4%. Based in Medford, OR, Lithia Motors delivered an average positive earnings surprise of 10.1% over the trailing four quarters, and has an Earnings ESP of +0.61%. The current Zacks Consensus Estimate for the second quarter of 2015 is pegged at $1.65 per share, reflecting 22.8% year-over-year growth. The company is slated to report results on Jul 22.

Investors can also count on Whole Foods Market, Inc. (WFM - Analyst Report), which has a Zacks Rank #2 and an Earnings ESP of +2.22%. The current Zacks Consensus Estimate for the third quarter of fiscal 2015 stands at 45 cents a share, reflecting 9.6% growth from the year-ago period. This Austin, TX-based company registered an average positive earnings surprise of 4.8% over the trailing four quarters, and has a long-term earnings growth rate of 12.1%. The company is scheduled to report on Jul 29.

Last but not least is ULTA Salon, Cosmetics & Fragrance, Inc. (ULTA - Snapshot Report), with a Zacks Rank #2 and an Earnings ESP of +0.90%. The current Zacks Consensus Estimate for the second quarter of fiscal 2015 stands at $1.11 per share, portraying 18.4% growth from the prior-year quarter. Based in Bolingbrook, IL, ULTA Salon delivered an average positive earnings surprise of 10.8% over the trailing four quarters, and has a long-term earnings growth rate of 19.6%. The company is expected to report on Sep 10.

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