Retail stocks often feel like shaky investments due to fickle consumer tastes, declining price expectations, and the ongoing disruption of Amazon. However, the Nielsen Consumer Confidence Index recently revealed that consumer confidence in the U.S. has actually been rising, hitting a score of 113 in the second quarter of 2016 compared to 98 a year ago.
Image source: Getty Images.
That's much higher than the baseline score of 100, and indicates that the low unemployment rate and growth of the housing market are still fueling consumer purchases. 70% of respondents were comfortable with their personal finances, and 58% were confident in their immediate spending intentions -- which both bode well for the retail sector.
Let's check out two solid retail stocks which will likely benefit from heavier consumer spending.
American Eagle Outfitters
The retail apparel sector can be a brutal one. The rise of cheap chic players like H&M and Forever 21 has flattened consumer price expectations, fickle consumers have shunned "big logo" brands like Abercrombie & Fitch (ANF +1.13%), and older retailers have struggled to pivot their businesses toward e-commerce channels.
But amid that chaos, American Eagle Outfitters (AEO +1.50%) outperformed most of its peers with a 15% gain since the beginning of the year. That growth was driven by three factors -- solid comps growth, the growth of its Aerie lingerie and activewear brand, and strategic store closures coupled with solid e-commerce growth.
Image source: American Eagle Outfitters.
American Eagle's comps rose 6% annually last quarter. That's impressive considering that Gap's comps fell 5% last quarter and A&F's comps slipped 4%. That growth was driven by 4% growth at American Eagles's namesake stores and 32% growth at Aerie.
Aerie has gained lots of momentum with younger female shoppers as the "anti-Victoria's Secret" with its untouched photos, relatable models, and "I am Aerie real" slogan. Digital sales accounted for 30% of Aerie's sales during the quarter. American Eagle plans to reduce its entire store count by 2% this year as higher margin sales from its digital channels at both brands take over.
Analysts expect that growth to continue with 3.5% sales growth and 16.5% earnings growth this year, which makes the stock look fairly cheap at 13 times forward earnings with a 2.8% yield.
Wal-Mart
Wal-Mart (WMT 0.52%) has rallied nearly 20% this year, as improving comps growth indicated that CEO Doug McMillon's turnaround plans -- which include price improvements, store reorganizations, wage hikes, and higher investments on e-commerce -- were paying off. Under McMillon, Wal-Mart has pushed back against Amazon by matching its prices, countering Prime with its ShippingPass service, offering curbside pickup for groceries, and expanding its digital ecosystem with new apps and video services.
Image source: Wal-Mart.
Wal-Mart's U.S. comps rose 1% last quarter, store traffic improved 1.5%, and e-commerce sales added 20 basis points to its total comps growth. Revenue rose 0.9% annually to $115.9 billion -- an improvement from its 1.4% decline in the previous quarter, and a 0.1% decline in the year ago quarter. International sales, which were hit by a strong dollar, fell 7.2%. Sam's Club revenue rose 1%, but traffic dipped 0.2%. The company noted that its "improved" inventory position boosted its overall cash flows during the quarter.
Wal-Mart's numbers aren't exciting, but analysts believe that its revenue will rise 0.8% this year before accelerating to 2.8% growth next year. Earnings are expected to fall 7% this year, due to the aforementioned investments, but rebound 3.5% next year. Simply put, it looks like Wal-Mart's numbers are finally stabilizing after being repeatedly struck down by Amazon over the past decade.
Wal-Mart's trailing P/E of 16 is lower than the industry average of 22 for the discount/variety stores sector, and its 2.7% yield should limit the stock's downside. I wouldn't count on Wal-Mart as a growth play like American Eagle, but it could be a solid income-generating defensive one for conservative investors.
Are American Eagle and Wal-Mart right for you?
American Eagle is a standout player in the retail sector, and it could gradually gain market share from rivals like A&F, Gap, and L Brands' Victoria's Secret over the long term. Meanwhile, the massive scale of Wal-Mart's operations enable it to undercut smaller rivals while using its stores and fulfillment centers to counter Amazon's strength in e-commerce. Therefore, I believe that American Eagle and Wal-Mart represent two solid ways to invest in the turbulent retail market.
