This Is Why Retail Earnings Will Shine This Year

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Includes: AMZN, BOOT, WMT, XLP, XLY, XRT, ZUMZ
by: Thomas Hughes

Summary

Consumer confidence surged to a new high and underscores outlook for the fall and holiday shopping season.

Confidence is driven by widespread employment, rising wages, and record confidence within the labor market.

Retailers are poised to reap record revenue, the time to invest in the sector is now before the earnings reports start rolling in.

Consumer Confidence Expands Along With Labor

Consumer confidence surged to a new high in September and points to healthy consumer spending in the second half of the year. The Conference Board's Consumer Confidence Survey jumped 3.7 points in the last month to reach 138.4 and the highest level in eighteen years. The surge in confidence follows an increase in the preceding month and puts the index within seven points of the all-time high.

While confidence grew regarding present conditions, it is the six-month forward outlook that showed the most improvement. The present conditions index increased only 0.3 points while the expectations index moved up by six. The gains are due to an increase in consumers who believe that there will be more jobs and stronger economic growth by next March.

In the statement, the Conference Board says the increase in confidence is due to a strong economy and robust job growth that should keep the economy growing at 3% or better for the rest of the year.

Expectations Are Rising, The Opportunity Is Now

There have already been two major upgrades to the outlook for holiday retail spending and I think they are too low.

The National Retail Federation upgraded its outlook for holiday sales in August to at least 4.5%. The NRF cited strong labor markets and economic growth as drivers of sales and that was echoed two weeks ago by Deloitte. Deloitte says retail sales could grow 5.0% to 5.5% over the holidays with much of the growth focused online.

Based on the Labor Markets Conditions Index, US labor market is the strongest it's been in 18 years and only getting stronger. The Kansas City Federal Reserve's LMCI jumped 0.09% in the last month to hit an 18-year high that is supported by rising momentum. The index has been leading the US economy since 2014 and is indicating expanding activity.

Notably, the number one contributing factor to labor market activity is worker confidence. Worker confidence is measured by the number of job leavers and the quits rate, two indications workers are leaving for newer, better, higher paying work than what they had before.

The most important factor is the money because it's always about the money. All this labor market confidence is because wages are going up. The average hourly wage has been growing above 2.5% on a YOY basis for more than two years and is the driving force behind the consumer.

Where Will The Money Go?

If there is one constant in the retail sector, it is that consumers are fickle. This makes picking individual stocks tricky at best, but it can be done. The obvious winners in this scenario will be Amazon (AMZN) and Walmart (WMT), Amazon because it dominates the online market and Walmart because it dominates in brick-and-mortar retail and has a growing presence online.

Online is where the biggest gains will be seen. Online sales are expected to accelerate from 16.6% sales growth during the holiday season of 2017 to over 22% YOY sales growth for the same period this year.

With that in mind, look for established multi-brand online retailers like Zumiez (ZUMZ) and Boot Barn Holdings, Inc. (BOOT) who are expected to see sales grow and accelerate by robust double digits.

Boot Barn Holdings, Inc. is a lifestyle retailer focused on western wear for men and women. It is a Zacks #1 ranked stock with expected earnings growth near 65% for the current year.

Zumiez is a lifestyle retailer focused on young men and women. It represents hundreds of brands including Vans, Nike, and Santa Cruz and is expected to see earnings grow by 53% in fiscal 2018.

By no means are these the only ones to benefit from rising consumer confidence, strengthening labor markets and higher wages. If you are looking for diverse coverage and the ease of ETFs, there is always the Retail Sector SPDR (XRT) or the Consumer Staples (XLP) or Consumer Discretionary (XLY).

Disclosure: I am/we are long XLP, XLY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.