3 Retailers to Buy Ahead of Earnings

For retail stocks, 2018 has been a comeback year with investors letting up on fears of Amazon.com Inc.'s (AMZN) dominance and applauding brick-and-mortars' successful evolution amid the e-commerce revolution. As a result, the SPDR S&P 500 Retail ETF (XRT) has outperformed the broader market, up 15.4% year-to-date (YTD) compared to the S&P 500's 7.2% increase.

With retail earnings around the corner, one team of analysts notes that while companies will have a lot to live up to, select players such as Burlington Stores Inc. (BURL), Ross Stores Inc. (ROST) and TJX Companies Inc. (TJX) are positioned to beat estimates and benefit from share gains, as outlined in a recent Barron's story. (See also: Amazon to Be #1 in Apparel in 2018: Morgan Stanley.)

Analyst Favors Off-Price Names

Deutsche Bank's Paul Trussell wrote a note to clients recommending that investors buy up shares of off-price retailers and stronger brands, especially in the athletic wear space. This is due to the fact that many retailers are valued to perfection, wrote the analyst, meaning that even a solid quarterly report could send shares plunging on lofty forecasts. Such was the case with department store Macy's Inc. (M). While the firm posted a beat-and-raise quarter, a sell-off led shares down 16%, closing at a 15-month low last Wednesday. 

Trussell rates discounters Burlington, Ross and TJX at buy, with Burlington winning the place at the top of his apparel picks into earnings. He highlights evidence of continued off-price retail demand through the growth of Nordstrom Inc.'s (JWN) discount arm, Nordstrom Rack, which generated higher-than-expected comparable store sales growth at 4% in the most recent quarter. 

The Deutsche Bank analyst lifted his 12-month price target on Burlington from $167 to $175, indicating that its "beat and raise story" will persist. Trading up 0.9% on Tuesday morning at $168.75, Burlington shares reflect a 37.2% gain YTD. 

While Trussell expects department stores like Kohl's Corp. (KSS), which he rates at hold, to post a strong quarter, he noted that the shares are already trading richly with expectations for beat-and-raise results already priced in. (See also: Why David Einhorn Is Scooping up Retail Stocks.)

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