Economic growth has produced higher wages and sent consumer confidence to a 17-year high, with consumer spending on a strong upward trend as a result. Despite headwinds from rising tariffs that are increasing the costs of imported products and materials, Robert Drbul, a senior managing director in the research division of Guggenheim Securities, sees a bright outlook for several leading retailers. As reported by Barron's, his top pick is Tapestry Inc. (TPR), while other retail stocks that he recommends are Amazon.com Inc. (AMZN), PVH Corp. (PVH), Nike Inc. (NKE), Kohl's Corp. (KSS) and Tiffany & Co. (TIF). Tapestry is the parent of Coach, while the top brands of PVH are Calvin Klein and Tommy Hilfiger.

Stock YTD Gain
Tapestry 7.6%
Amazon 55.4%
PVH 12.3%
Nike 22.9%
Kohl's 33.7%
Tiffany 31.5%
S&P Retail Select Industry Index (SPSIRE) 9.0%
S&P 500 Index (SPX) 5.4%

Sources: Barron's, S&P Dow Jones Indices; calculations through the close on July 27.

Drbul cites several positives for the retail sector in addition to the key macro driver of rising consumer spending: healthy balance sheets, lean inventories, closures of underperforming stores, improving e-commerce strategies, and benefits from tax reform. While the stock prices of many retailers are near all-time highs, he indicates that "many of these gains have been warranted," per Barron's. Tiffany and Nike are discussed in more detail below, as representative cases.

Macro Driver: Consumer Spending

As quoted by Barron's, Drbul wrote last week that the U.S. consumer "remains quite healthy and in a strong position." Personal consumption expenditures reached an all-time high in the second quarter, up by 1.4% from the first quarter, and 6.8% above spending in the fourth quarter of 2016, per the U.S Bureau of Economic Analysis (BEA). Meanwhile, on an inflation-adjusted basis, the U.S. Bureau of Labor Statistics projects an average annual growth rate of 1.9% through 2026.

Luxury retailer Tiffany and apparel giant Nike are both dramatically outpacing the stock market as they benefit from these macro trends.

Tiffany: 'Transformed Overnight'

Tiffany has seen sales of jewelry and other luxury goods surge at its worldwide network of stores, providing diversification against a possible downtick in U.S. consumer spending. And its U.S. stores, especially its flagship location on Fifth Avenue in Manhattan, are attracting free-spending foreign tourists, as noted by the New York Post. The Post also indicates that Tiffany is making progress with a plan to win younger shoppers from rival stores and websites, and that its same-store sales are growing briskly, exceeding analysts' estimates.

CNN reports that sales growth was spread across the globe for Tiffany, while U.S. tax reform reduced its effective tax rate by more than six percentage points. CNBC commentator Jim Cramer said that "they've made extraordinary strides at improving their execution," crediting new CEO Alessandro Bogliolo with much of the company's turnaround. "Almost overnight, he's transformed what once was the stodgiest and least up-to-date luxury retailer around into a growth powerhouse," Cramer added, citing new product lines, a better online strategy, and new sales slogans.

Nike: 'Triple Double'

Like Tiffany, athletic footwear, apparel and equipment maker Nike has engineered a turnaround in its North American operations by posting widespread sales improvement across its product lines, sales regions and customer segments as part of its "triple double" plan to double innovation, speed to market and digital sales, according to Seeking Alpha. Investment in technology has shrunk the average product creation timeline by more than 50%.

Lurking Dangers

Skeptics will point out that trade wars may hamper overseas sales of these companies, while increased costs due to U.S. tariffs eventually are likely to result either in margin compression or, if passed along to the consumer, sales declines. Moreover, the U.S. economy is overdue for a recessionary period, and that is just about guaranteed to depress consumer spending and retail sales.