Two Diamond In the Rough Retail Plays

Today, Thomson Reuters released its monthly same-store sales report on several of the nation’s top retailers. We won’t receive the official March retail sales data until early next week, so this is a good primer on the state of the American consumer.

Unfortunately, the report was somewhat of a disappointment. Excluding drug stores, the group reported no same-store sales growth over March 2014; economists were expecting a 0.1% gain.

Consumer spending was subdued in March due to an unusually long winter, the West Coast port slowdown and the strong dollar, which weighed on international sales. However, two of the reports stood out to me as being more positive than the rest. Let’s take a look:

Costco Wholesale Corp.

First up, Costco Wholesale Corp. (COST) reported a 2% decline in same-store sales. Economists were expecting a 1.2% decline. Costco’s headline results were weighed down by foreign currency headwinds and lower gasoline prices. However, excluding the negative impact of gasoline prices and foreign currencies, the company posted 4% same-store sales growth.

There is no doubt that despite a challenging pricing environment for gasoline and the stronger dollar, Costco remains the top retail wholesaler. For the first quarter, Costco is expected to post 9.3% annual earnings growth. However, given the company’s track record of earnings surprises, I wouldn’t be surprised to see an even stronger result. I consider COST a Strong Buy.

L Brands Inc.

Moving along to L Brands Inc. (LB), this boutique-based retailer knocked analyst estimates out of the park by posting a 9% jump in same-store sales. Analysts forecast 6% same-store sales growth. As the operator of Victoria’s Secret and Bath and Body Works, Limited Brands is a mainstay in shopping malls across the country. For this quarter, L Brands is headed for 5.7% sales growth and 7.5% earnings growth. LB earns an A (Strong Buy) in Portfolio Grader.

As you can see below, L Brands was one of only two retailers to beat economists’ expectations. While the other retail stocks currently earn decent marks in Portfolio Grader, it’s really COST and LB that I have my eye on.

Ticker Company Name March Sales Est. Sales My Recommendation
COST Costco Wholesale -2.0% -1.2% Strong Buy
CATO The Cato Corp. 12.0% 4.0% Cautious Buy
BKE The Buckle -0.5% 0.7% Cautious Buy
LB L Brands 9.0% 6.0% Strong Buy
RAD Rite Aid 4.30% 5.30% Cautious Buy
ZUMZ Zumiez 5.50% 6.40% Cautious Buy

Sincerely,

Louis Navellier

Louis Navellier

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