The ongoing trade war between the U.S. and China continues to weigh on the overall market, but the negative impacts from a tariff war have yet to derail the overall economy. A strong labor market with low unemployment and a resilient stock market has produced strong consumer confidence in the U.S.
The ultimate result of a drawn-out trade war will be lower consumer confidence if inflation becomes a problem and prices start to rise too fast for consumers. Retailers have, for the most part, remained strong, and this week we get a much clearer view of the overall retail sector as a wave of big-name retailers from multiple sectors report their quarterly numbers.
Retail stocks have pulled back with the overall market in recent weeks, but retail reports have been good, and a strong week of retail earnings could help ease the market’s concerns and bring strength back into retail stocks.
Membership club Costco (COST) has enjoyed steady earnings growth with profits up 10.5% per annum over the last five years. Looking ahead analysts expect more of the same for Costco with forecast average annual earnings of 10.7% for the next five years. Valuation is a bit high ahead of the company’s fiscal third-quarter report after the market close Thursday. Last quarter Costco reported mixed-results with better than expected profits on slightly weaker than expected sales. The market put its focus on the earnings beat with COST shares currently trading just shy of its all-time high set on May 22. Costco is viewed as a retailer with a level of protection from the U.S./China trade war because of the company’s grocery shares. The stock is priced for perfection with a forward P/E of 29 which puts additional pressure on the company to deliver earnings that are either in-line or better than expected for the most recent quarter. Analysts expect a small Q3 earnings beat of $1.84 per share versus the $1.82 consensus. During the same period last year Costco earned $1.70 per share. COST trades at $247.73 with an average price target of $249.20.
Burlington Stores (BURL)
Overall economic conditions in the U.S. remain favorable with the off-priced sector showing particular strength. Burlington Stores (BURL) has traded sideways the last year after a multi-year strong bull run. The company has enjoyed strong earnings growth the last five years of 37% annually the last five years. BURL’s recent sideways comes with annual earnings growth expected to fall to 15% for the next five years. Analysts forecast earnings of $1.26 when the company reports Q1 numbers before the market open Thursday, in-line with the same period last year. The stock is currently priced for perfection at 25 times earnings. Burlington has posted positive earnings surprises the last 15 quarters but sales were weaker than expected last quarter for the first time since May 2017. The street believes another earnings beat is in store for the company with a whisper number of $1.30 per share. BURL trades at $150.79 with an average price target of $178.81.
Dollar General (DG)
Discount retailer Dollar General (DG) has enjoyed strong and steady gains over the last five years and the stock is currently trading just shy of its all-time high set in late-April. The stock is trading at 17 times future earnings ahead of its first-quarter report scheduled for Thursday morning before the market open. Analysts expect to see first-quarter earnings of $1.39 per share, but the street expects a small positive earnings surprise with a whisper number of $1.40. Dollar General posted earnings of $1.36 during the same period last year. Dollar General continues to grow with analysts forecasting annual earnings growth of 11.4% over the next five years Dollar General reported a small earnings miss last quarter but the market focused on the company’s growth story and pushed the stock to a new all-time high. DG trades at $121.33 with an average price target of $125.68.
The Gap (GPS)
Specialty apparel retailer The Gap (GPS) will report its first-quarter numbers after the market close Thursday. The Gap has traded lower on the last year as earnings have fallen. The Gap recently announced plans to spin off the company into two new entities with Old Navy becoming a stand alone entity to unlock some of its value. In February the company posted mixed results with a small revenue miss, while earnings top estimates for the third straight quarter, versus the consensus $0.31, down from $0.42 during the same period last year. The street expects another positive earnings surprise with a whisper number of $0.32 for the quarter. GPS is currently trading just above its 52-week low but if the company is able to post better than expected earnings and sales the stock should start to recover. The stock is currently trading at just 8.3 times earnings and analysts have an average price target of $30.27 versus its current $21.63 price.