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4 Retail Stocks to Buy Amid Signs of Cautious Consumer Spending

Retail sales in the United States showed minimal growth in May, reflecting ongoing consumer struggles with high inflation and interest rates. The Commerce Department's report revealed that sales rose a modest 0.1% on a month-on-month basis, a slight improvement over the revised 0.2% decline seen in April. Despite this small increase, the year-over-year growth rate stood at 2.3%.

May's retail sales inched up to $703.1 billion, indicating a subdued consumer environment. The modest rise was driven partly by a rebound in sales from motor vehicle and parts dealers, though this was offset by a notable decline in sales at gas stations, attributed to falling gas prices.

Economists noted that while the slight uptick in retail sales was better than the previous month's decline, it still painted a picture of a cautious consumer environment. The report suggests that Americans are tightening their belts.

Interestingly, the subdued retail sales report might have a silver lining for monetary policy. Softer-than-expected consumer spending could prompt the Federal Reserve to reconsider its stance on interest rates. Market pundits anticipate two rate cuts this year, though recent Fed meetings suggest the likelihood of just one.

As such, the slight increase in retail sales, while not robust, provides a glimmer of hope for a possible easing of monetary policy, which, in turn, could support future growth.

Breaking Down the Sales Number

Motor vehicle and parts dealers experienced a 0.8% increase in sales. Electronics and appliance stores witnessed a marginal rise of 0.4% in sales. Sales at health and personal care stores rose 0.1%, and non-store retailers, representing the online sphere, reported a 0.8% increase.

Clothing and clothing accessories outlets witnessed a jump of 0.9%. Miscellaneous stores reported a 0.4% increase, and sales at sporting goods, hobbies, musical instruments and bookstores jumped 2.8%. General merchandise stores showed marginal growth of 0.1%.

On the contrary, furniture and home furnishing stores experienced a notable 1.1% decline in sales. Building material and supplies dealers witnessed a 0.8% drop, while food and beverage stores saw a slight decrease of 0.2%. Gasoline stations witnessed a more pronounced drop of 2.2% in receipts. Food services and drinking places witnessed a 0.4% fall in sales.

Past-Year Price Performance

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

4 Prominent Picks

Abercrombie & Fitch Co. ANF is a potential pick. By integrating digital and physical retail experiences, Abercrombie & Fitch offers a seamless shopping experience, driving higher customer satisfaction and loyalty. Moreover, strategic marketing initiatives, particularly targeted campaigns in key markets, have been highly effective in boosting brand visibility and customer acquisition. The introduction of innovative product lines meets specific customer needs and broadens the brand's appeal. Abercrombie & Fitch’s regional operating model, with a focus on the Americas, the EMEA and the APAC, provides a solid foundation for global expansion.

This leading, global, omnichannel specialty retailer of apparel and accessories for men, women and kids delivered a trailing four-quarter earnings surprise of 210.3%, on average. The Zacks Consensus Estimate for Abercrombie & Fitch’s current financial-year sales and earnings suggests growth of 10.4% and 47.3% from the year-ago period. The stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Sprouts Farmers Market, Inc. SFM is worth betting on. Through product innovation, targeted marketing and competitive pricing, Sprouts Farmers ensures that its offerings resonate with its diverse customer base. The company's dedication to natural and organic products has been a key strategy, recognizing the surging demand for healthier options and expanding its presence in this segment. Additionally, Sprouts Farmers has invested in expanding its private-label offerings. This emphasis on private-label items not only sets the company apart from competitors but also fosters customer loyalty by offering unique and high-quality products.

The Zacks Consensus Estimate for Sprouts Farmers’ current fiscal sales and EPS suggests growth of 8% and 9.9%, respectively, from the year-ago reported figure. SFM, which sports a Zacks Rank #1, delivered a trailing four-quarter earnings surprise of 9.2%, on average.

Investors can count on Walmart Inc. WMT. This omnichannel retail giant has been diligently working to strengthen its already formidable presence in the market. The company has embarked on a series of strategic e-commerce initiatives, encompassing acquisitions, partnerships and significant improvements in its delivery and payment systems. Simultaneously, Walmart is committed to elevating its merchandise offerings, ensuring a diverse and appealing product assortment. Innovation extends to its supply chain, wherein the company is enhancing capacity and introducing cutting-edge solutions.

The Zacks Consensus Estimate for Walmart’s current financial-year sales and earnings suggests growth of 4.2% and 9%, respectively, from the year-ago reported numbers. This Zacks Rank #2 (Buy) company has a trailing four-quarter earnings surprise of 8.3%, on average.

Burlington Stores, Inc. BURL is worth considering. The company has adeptly responded to the challenges in the retail landscape by strategically emphasizing recognizable brands, implementing the best pricing strategy and targeting trade-down shoppers. The implementation of strategic initiatives aimed at enhancing merchandising capabilities, operational efficiency and store optimization is likely to support revenue growth. By focusing on initiatives such as store relocations and downsizing, Burlington Stores aims to improve store productivity.

The Zacks Consensus Estimate for Burlington Stores’ current fiscal sales and EPS suggests growth of 9.5% and 25.4%, respectively, from the year-ago reported figure. This Zacks Rank #2 company has a trailing four-quarter earnings surprise of 21.7%, on average.

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