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The retail sector is staging a solid comeback as inflationary pressures ease. The sector struggled for months, crippled by sky-high inflation and higher borrowing costs. The jump in August retail sales proves that the U.S. economy is on solid ground.
The retail sector is expected to get a further boost as the Fed gears up to announce its rate cut today, the first since March 2020. Given this scenario, investing in retail stocks would be a prudent choice.
We have narrowed our search to four retail stocks such as Boot Barn Holdings, Inc. BOOT, JD.com, Inc. JD, Chewy, Inc. CHWY and Abercrombie & Fitch ANF,with strong potential for 2024. These stocks have seen positive earnings estimate revisions in the last 60 days. Each of the stocks has a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Retail Sales Jump in August
The Commerce Department said on Tuesday that retail sales rose 0.1% in August after rising the most in 18 months in July and beating analysts’ expectations of a decline of 0.2%. In July, retail sales rose 1.1%.
Year over year, retail sales grew 2.1% in August. Online retail sales made a solid rebound, increasing 1.4% in August after declining 0.4% in the previous month.
Sales at stores specializing in sporting goods, hobbies, musical instruments, and books rose by 0.3%. Sales at building material and garden equipment stores increased 0.1%. Miscellaneous retailers’ sales jumped 1.7%.
The latest data indicates that consumers are still spending at an aggressive pace as inflation continues to cool. Also, the average paychecks have risen substantially since the COVID-19 outbreak, which has been helping Americans spend despite the increase in prices of several necessities.
Fed Rate Cut to Boost Retail Stocks
Signs of cooling inflation have convinced the Federal Reserve to finally go ahead with its rate cut plans. The retail sale report came as the Federal Reserve began its two-day policy meeting. The financial community is hopeful that the Fed will go for its first rate cut in more than four years.
Also, the U.S. economy is on solid ground. The U.S. GDP grew 3% in the second quarter after growth slowed to 1.4% in the first quarter. The Atlanta Fed upwardly revised its third-quarter GDP growth estimate to an annual rate of 3% from the earlier projected 2.5% pace after the release of the retail sales data.
Presently, the CME FedWatch tool shows a 63% probability of a 25-basis point cut this week, while a 37% chance of a 50-basis point cut. Even if the Fed goes for a small rate cut, it bodes well for the broader economy. The retail sector is expected to get a boost as lower borrowing costs will allow consumers to spend freely.
Retail Stocks Set to Gain:
Boot Barn Holdings, Inc.
Boot Barn Holdings, Inc. operates as a lifestyle retail chain devoted to western and work-related footwear, apparel and accessories. BOOT’s products include boots, denim, western shirts, cowboy hats, belts and belt buckles, and western-style jewelry and accessories. Boot Barn sells its products through bootbarn.com, an e-commerce Website.
Boot Barn Holdings’ expected earnings growth rate for the current year is 10.7%. The Zacks Consensus Estimate for current-year earnings has improved 11.4% over the past 60 days. Boot Barn Holdings currently sports a Zacks Rank #1.
JD.com, Inc.
JD.com, Inc. operates as an online direct sales company in China. JD, through its website www.jd.com, and mobile applications, offers a selection of authentic products.
JD.com’s expected earnings growth rate for the current year is 27.2%. The Zacks Consensus Estimate for current-year earnings has improved 16.8% over the past 60 days. JD currently carries a Zacks Rank #1.
Chewy, Inc.
Chewy, Inc. operates as an online pet retailer. CHWY offers pet products that include dry and wet food, toys, mats, biscuits, vitamins and supplements.
CHWY’s expected earnings growth rate for the current year is 65.2%. The Zacks Consensus Estimate for current-year earnings has improved 34.1% over the past 60 days. CHWY currently has a Zacks Rank #2.
Abercrombie & Fitch
Abercrombie & Fitch operates as a specialty retailer of premium, high-quality casual apparel for men, women, and kids through a network of approximately 850 stores across North America, Europe, Asia and the Middle East. ANF's product portfolio includes knit and woven shirts, graphic T-shirts, fleece, jeans and woven pants, shorts, sweaters, outerwear, personal care products and accessories for men, women and kids, under the Abercrombie & Fitch, Abercrombie kids and Hollister brands.
Abercrombie & Fitch’s expected earnings growth rate for the current year is 63.4%. The Zacks Consensus Estimate for current-year earnings has improved 10.9% over the past 60 days. ANF currently sports a Zacks Rank #1.
Zacks Investment Research
Growth stocks are attractive to many investors, as above-average financial growth helps these stocks easily grab the market's attention and produce exceptional returns. But finding a great growth stock is not easy at all.
In addition to volatility, these stocks carry above-average risk by their very nature. Also, one could end up losing from a stock whose growth story is actually over or nearing its end.
However, the Zacks Growth Style Score (part of the Zacks Style Scores system), which looks beyond the traditional growth attributes to analyze a company's real growth prospects, makes it pretty easy to find cutting-edge growth stocks.
Abercrombie & Fitch (ANF) is on the list of such stocks currently recommended by our proprietary system. In addition to a favorable Growth Score, it carries a top Zacks Rank.
Studies have shown that stocks with the best growth features consistently outperform the market. And for stocks that have a combination of a Growth Score of A or B and a Zacks Rank #1 (Strong Buy) or 2 (Buy), returns are even better.
Here are three of the most important factors that make the stock of this teen clothing retailer a great growth pick right now.
Earnings Growth
Earnings growth is arguably the most important factor, as stocks exhibiting exceptionally surging profit levels tend to attract the attention of most investors. For growth investors, double-digit earnings growth is highly preferable, as it is often perceived as an indication of strong prospects (and stock price gains) for the company under consideration.
While the historical EPS growth rate for Abercrombie is 33.5%, investors should actually focus on the projected growth. The company's EPS is expected to grow 63.3% this year, crushing the industry average, which calls for EPS growth of 11.1%.
Cash Flow Growth
Cash is the lifeblood of any business, but higher-than-average cash flow growth is more beneficial and important for growth-oriented companies than for mature companies. That's because, high cash accumulation enables these companies to undertake new projects without raising expensive outside funds.
Right now, year-over-year cash flow growth for Abercrombie is 225.2%, which is higher than many of its peers. In fact, the rate compares to the industry average of -10.7%.
While investors should actually consider the current cash flow growth, it's worth taking a look at the historical rate too for putting the current reading into proper perspective. The company's annualized cash flow growth rate has been 14.8% over the past 3-5 years versus the industry average of 5.7%.
Promising Earnings Estimate Revisions
Beyond the metrics outlined above, investors should consider the trend in earnings estimate revisions. A positive trend is a plus here. Empirical research shows that there is a strong correlation between trends in earnings estimate revisions and near-term stock price movements.
There have been upward revisions in current-year earnings estimates for Abercrombie. The Zacks Consensus Estimate for the current year has surged 8.1% over the past month.
Bottom Line
While the overall earnings estimate revisions have made Abercrombie a Zacks Rank #1 stock, it has earned itself a Growth Score of A based on a number of factors, including the ones discussed above.
You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
This combination indicates that Abercrombie is a potential outperformer and a solid choice for growth investors.
Zacks Investment Research
Investors often turn to recommendations made by Wall Street analysts before making a Buy, Sell, or Hold decision about a stock. While media reports about rating changes by these brokerage-firm employed (or sell-side) analysts often affect a stock's price, do they really matter?
Before we discuss the reliability of brokerage recommendations and how to use them to your advantage, let's see what these Wall Street heavyweights think about Abercrombie & Fitch (ANF).
Abercrombie currently has an average brokerage recommendation (ABR) of 2.00, on a scale of 1 to 5 (Strong Buy to Strong Sell), calculated based on the actual recommendations (Buy, Hold, Sell, etc.) made by eight brokerage firms. An ABR of 2.00 indicates Buy.
Of the eight recommendations that derive the current ABR, four are Strong Buy, representing 50% of all recommendations.
Brokerage Recommendation Trends for ANF
The ABR suggests buying Abercrombie, but making an investment decision solely on the basis of this information might not be a good idea. According to several studies, brokerage recommendations have little to no success guiding investors to choose stocks with the most potential for price appreciation.
Are you wondering why? The vested interest of brokerage firms in a stock they cover often results in a strong positive bias of their analysts in rating it. Our research shows that for every "Strong Sell" recommendation, brokerage firms assign five "Strong Buy" recommendations.
This means that the interests of these institutions are not always aligned with those of retail investors, giving little insight into the direction of a stock's future price movement. It would therefore be best to use this information to validate your own analysis or a tool that has proven to be highly effective at predicting stock price movements.
Zacks Rank, our proprietary stock rating tool with an impressive externally audited track record, categorizes stocks into five groups, ranging from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell), and is an effective indicator of a stock's price performance in the near future. Therefore, using the ABR to validate the Zacks Rank could be an efficient way of making a profitable investment decision.
Zacks Rank Should Not Be Confused With ABR
Although both Zacks Rank and ABR are displayed in a range of 1-5, they are different measures altogether.
Broker recommendations are the sole basis for calculating the ABR, which is typically displayed in decimals (such as 1.28). The Zacks Rank, on the other hand, is a quantitative model designed to harness the power of earnings estimate revisions. It is displayed in whole numbers -- 1 to 5.
It has been and continues to be the case that analysts employed by brokerage firms are overly optimistic with their recommendations. Because of their employers' vested interests, these analysts issue more favorable ratings than their research would support, misguiding investors far more often than helping them.
In contrast, the Zacks Rank is driven by earnings estimate revisions. And near-term stock price movements are strongly correlated with trends in earnings estimate revisions, according to empirical research.
Furthermore, the different grades of the Zacks Rank are applied proportionately across all stocks for which brokerage analysts provide earnings estimates for the current year. In other words, at all times, this tool maintains a balance among the five ranks it assigns.
Another key difference between the ABR and Zacks Rank is freshness. The ABR is not necessarily up-to-date when you look at it. But, since brokerage analysts keep revising their earnings estimates to account for a company's changing business trends, and their actions get reflected in the Zacks Rank quickly enough, it is always timely in indicating future price movements.
Is ANF Worth Investing In?
Looking at the earnings estimate revisions for Abercrombie, the Zacks Consensus Estimate for the current year has increased 8.1% over the past month to $10.26.
Analysts' growing optimism over the company's earnings prospects, as indicated by strong agreement among them in revising EPS estimates higher, could be a legitimate reason for the stock to soar in the near term.
The size of the recent change in the consensus estimate, along with three other factors related to earnings estimates, has resulted in a Zacks Rank #1 (Strong Buy) for Abercrombie. You can see the complete list of today's Zacks Rank #1 (Strong Buy) stocks here
Therefore, the Buy-equivalent ABR for Abercrombie may serve as a useful guide for investors.
Zacks Investment Research
Abercrombie & Fitch (ANF) has been one of the most searched-for stocks on Zacks.com lately. So, you might want to look at some of the facts that could shape the stock's performance in the near term.
Over the past month, shares of this teen clothing retailer have returned -19.1%, compared to the Zacks S&P 500 composite's +1.6% change. During this period, the Zacks Retail - Apparel and Shoes industry, which Abercrombie falls in, has lost 19.2%. The key question now is: What could be the stock's future direction?
While media releases or rumors about a substantial change in a company's business prospects usually make its stock 'trending' and lead to an immediate price change, there are always some fundamental facts that eventually dominate the buy-and-hold decision-making.
Earnings Estimate Revisions
Here at Zacks, we prioritize appraising the change in the projection of a company's future earnings over anything else. That's because we believe the present value of its future stream of earnings is what determines the fair value for its stock.
We essentially look at how sell-side analysts covering the stock are revising their earnings estimates to reflect the impact of the latest business trends. And if earnings estimates go up for a company, the fair value for its stock goes up. A higher fair value than the current market price drives investors' interest in buying the stock, leading to its price moving higher. This is why empirical research shows a strong correlation between trends in earnings estimate revisions and near-term stock price movements.
For the current quarter, Abercrombie is expected to post earnings of $2.31 per share, indicating a change of +26.2% from the year-ago quarter. The Zacks Consensus Estimate has changed +5.6% over the last 30 days.
For the current fiscal year, the consensus earnings estimate of $10.26 points to a change of +63.4% from the prior year. Over the last 30 days, this estimate has changed +8.1%.
For the next fiscal year, the consensus earnings estimate of $10.36 indicates a change of +1% from what Abercrombie is expected to report a year ago. Over the past month, the estimate has changed +7%.
With an impressive externally audited track record, our proprietary stock rating tool -- the Zacks Rank -- is a more conclusive indicator of a stock's near-term price performance, as it effectively harnesses the power of earnings estimate revisions. The size of the recent change in the consensus estimate, along with three other factors related to earnings estimates, has resulted in a Zacks Rank #1 (Strong Buy) for Abercrombie.
The chart below shows the evolution of the company's forward 12-month consensus EPS estimate:
12 Month EPS
Projected Revenue Growth
Even though a company's earnings growth is arguably the best indicator of its financial health, nothing much happens if it cannot raise its revenues. It's almost impossible for a company to grow its earnings without growing its revenue for long periods. Therefore, knowing a company's potential revenue growth is crucial.
In the case of Abercrombie, the consensus sales estimate of $1.17 billion for the current quarter points to a year-over-year change of +11.2%. The $4.84 billion and $5.08 billion estimates for the current and next fiscal years indicate changes of +13.1% and +5%, respectively.
Last Reported Results and Surprise History
Abercrombie reported revenues of $1.13 billion in the last reported quarter, representing a year-over-year change of +21.2%. EPS of $2.50 for the same period compares with $1.10 a year ago.
Compared to the Zacks Consensus Estimate of $1.09 billion, the reported revenues represent a surprise of +4.06%. The EPS surprise was +16.82%.
The company beat consensus EPS estimates in each of the trailing four quarters. The company topped consensus revenue estimates each time over this period.
Valuation
Without considering a stock's valuation, no investment decision can be efficient. In predicting a stock's future price performance, it's crucial to determine whether its current price correctly reflects the intrinsic value of the underlying business and the company's growth prospects.
Comparing the current value of a company's valuation multiples, such as its price-to-earnings (P/E), price-to-sales (P/S), and price-to-cash flow (P/CF), to its own historical values helps ascertain whether its stock is fairly valued, overvalued, or undervalued, whereas comparing the company relative to its peers on these parameters gives a good sense of how reasonable its stock price is.
As part of the Zacks Style Scores system, the Zacks Value Style Score (which evaluates both traditional and unconventional valuation metrics) organizes stocks into five groups ranging from A to F (A is better than B; B is better than C; and so on), making it helpful in identifying whether a stock is overvalued, rightly valued, or temporarily undervalued.
Abercrombie is graded A on this front, indicating that it is trading at a discount to its peers. Click here to see the values of some of the valuation metrics that have driven this grade.
Conclusion
The facts discussed here and much other information on Zacks.com might help determine whether or not it's worthwhile paying attention to the market buzz about Abercrombie. However, its Zacks Rank #1 does suggest that it may outperform the broader market in the near term.
Zacks Investment Research
Cooling inflation and rising expectations of a potential interest rate cut have lifted U.S. consumer sentiment to its highest level in four months this September. The University of Michigan's preliminary report showed the sentiment index climbing to 69, up from 67.9 in August. This improvement even surpassed the market's estimate of 68.5, indicating a growing sense of optimism about the economy.
This boost in sentiment marks the second consecutive month of growth. Although inflation remains a concern, its recent moderation, along with lower gasoline prices, has increased consumers' purchasing power. This positive shift bodes well for the retail sector, suggesting that companies like Abercrombie & Fitch Co. ANF, Sprouts Farmers Market, Inc. SFM, Chewy, Inc. CHWY and Deckers Outdoor Corporation DECK could experience higher sales as consumers feel more confident about spending.
In August, inflation reached its lowest level since February 2021, with the Consumer Price Index showing only a modest increase of 0.2% month over month. On a year-over-year basis, inflation rose by 2.5%, down from July's 2.9% growth, reflecting a steady cooling in price pressures. The sustained decrease in inflation has brought it closer to the Fed’s desirable target of 2%.
The Federal Reserve has been closely watching these trends. In response, market pundits anticipate a quarter-percentage-point cut in interest rates. This move could ease borrowing costs, supporting both consumer spending and business investment.
While some caution remains due to the upcoming November presidential election, the overall outlook is optimistic. As consumers enter the final quarter of the year, their increased confidence about financial situations is setting a positive tone for the retail sector heading into the holiday season.
Past-Year Stock Price Performance of ANF, SFM, CHWY & DECK
4 Prominent Retail Stocks
Abercrombie & Fitch: Brand Visibility & Global Expansion
Abercrombie & Fitch stands out as a strong investment choice. The company excels in integrating digital and physical retail channels, offering a seamless shopping experience and driving higher customer satisfaction and loyalty. Strategic marketing initiatives, particularly targeted campaigns in key markets, have been 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 (Europe, the Middle East and Africa) and the APAC (Asia-Pacific), provides a solid foundation for global expansion.
This leading, global, omnichannel specialty retailer of apparel and accessories for men, women and kids has a trailing four-quarter earnings surprise of 28%, on average. The Zacks Consensus Estimate for Abercrombie & Fitch’s current financial-year sales and earnings per share (EPS) suggests growth of 13.1% and 63.4% from the year-ago period. The company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Sprouts Farmers: Product Innovation & Competitive Pricing
Sprouts Farmers, operating in a highly fragmented grocery industry, is a compelling option. The company has adopted a multifaceted approach to expand its customer base and cater to evolving consumer preferences. Through product innovation, targeted marketing and competitive pricing, Sprouts Farmers ensures that its offerings resonate with its diverse customer base. The company’s commitment to offering fresh, natural and organic products aligns with the growing consumer demand for healthier food options.
The Zacks Consensus Estimate for Sprouts Farmers’ current financial-year sales and EPS suggests growth of 9.6% and 18.7%, respectively, from the year-ago reported figure. SFM, which sports a Zacks Rank #1, has a trailing four-quarter earnings surprise of 12%, on average.
Chewy: Autoship Growth & Veterinary Expansion
Chewy is a notable player in the online pet retail market. The company’s Autoship program, central to its revenue strategy, drives significant sales through its subscription-based model, focusing on essential consumables and healthcare products. Chewy’s premium product offerings and growth in Net Sales Per Active Customer reflect strong customer loyalty and repeat purchases. The expansion into veterinary services through new clinics enhances customer acquisition and retention. The growing Sponsored Ads business is on track to become a significant revenue stream.
The Zacks Consensus Estimate for Chewy’s current fiscal sales and EPS suggests growth of 5.7% and 65.2%, respectively, from the year-ago reported figure. This Zacks Rank #2 (Buy) company has a trailing four-quarter earnings surprise of 50.9%, on average.
Deckers: Direct-to-Consumer & International Growth
Deckers also presents a solid investment opportunity. The company has shown robust growth through its strategic focus on expanding its brand presence and strengthening direct-to-consumer channels. This approach, along with a commitment to innovation in product development and a keen focus on international market expansion, has positioned the company for continued success. Deckers' commitment to elevating renowned brands like UGG and HOKA into global lifestyle icons enhances brand equity and market reach.
The Zacks Consensus Estimate for Deckers’ current financial-year sales and earnings suggests growth of 11.5% and 8.4%, respectively, from the year-ago reported numbers. This Zacks Rank #2 company has a trailing four-quarter earnings surprise of 47.2%, on average.
Zacks Investment Research
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