Don’t Miss These 3 Retail Stocks for Fall Gains

Key Points

• With inflation cooling and wages increasing, retail stocks are primed for growth thanks to increased customer spending.
• Abercrombie, Burlington, and Ross have seen stock prices surge on renewed consumer interest and an increased focus on affordable clothing options.
• These companies have all experienced significant stock improvement in recent quarters but are forecasted to continue to surge.

U.S. retail and food service sales for August reached nearly $711 billion, an improvement of 0.1% sequentially and 2.1% year-over-year. Though relatively modest, these gains nonetheless represent a surprise, as many analysts had anticipated that poor auto sales and the lingering impact of inflation would prompt a decline in retail sales overall. Growth in this area suggests that consumers in the U.S. are still interested in spending money on retail goods, despite a variety of pressures.

There is reason to think that these trends may continue. Wages climbed by 4.6% in August, outpacing inflation rates of 2.5%. This is the first time wages have climbed faster than inflation in over a year and a half. If inflation continues to cool and wages grow more quickly, consumers as a group will have more money available to spend on non-essential retail items. Spending is also likely to get a boost by the recently-announced 50 basis point reduction in the federal funds rate.

Given these developments, and ahead of the busy end-of-year shopping period, investors may wish to consider retail stocks for the fall. Some retailers have seen share prices pummeled in the last year, but the companies below are all up at least 34% in that timeframe.

ANF: Back in Style, Expanding Carefully

Abercrombie & Fitch Co. NYSE: ANF has experienced an incredible comeback in the last year, with shares coming close to tripling in value in that time. Net income in the most recent quarter of $133 million was well over double that a year ago, and sales topped $1.1 billion. The company also increased its full-year sales guidance to an improvement of 12% to 13%, despite the fact that its fiscal 2024 will be one week shorter than fiscal 2023.

What's behind Abercrombie's massive gains in the last year? The firm's Hollister brand has surged in popularity among younger consumers as fashion trends from the 90s regain a place in today's popular culture. And the company's Abercrombie Kids has expanded rapidly to reach a broader audience and also include items for babies and toddlers. Abercrombie has managed to balance online sales against costlier brick-and-mortar expansion and its targeted growth in previously underexposed regions has contributed further.

Despite the rapid growth in recent quarters, analysts still see Abercrombie as an attractive prospect. Its average price target is $176.57, representing an upside potential of nearly 27%.

BURL: Discount Apparel and Strong Top-Line Growth

Affordable apparel is popular among consumers, as evidenced by strong earnings reports from a number of discounted and off-price merchandise outfits. Burlington Stores Inc. NYSE: BURL is notable among them, having grown overall sales by 13% and comparable sales by 5% year-over-year in the most recent quarter.

Burlington has increased its sales while minimizing product sourcing costs relative to those sales, helping it to drive gross margin improvement of 1.1% in the latest quarter.

The company has thoughtfully grown its inventory to match demand for the busy back-to-school season and wisely bought up dozens of leases of former Bed Bath & Beyond store locations, allowing it to expand at a discount.

ROST: Impressive Growth and Improving Margins

Ross Stores Inc. NASDAQ: ROST is another affordable apparel retailer to watch. Like Burlington, it has experienced massive sales growth including strong comparable store sales and increasing store counts in recent quarters.

It has also managed to improve its operating margin in the process, making it more efficient and capturing income from each sale.

Though Ross shares have also rallied in the last year, there may be additional room for growth.

Analysts see an average price target of $169.71, almost 10% higher than current price levels, for the stock. Ross also has a history of dividend increases and maintains a sustainable 24.79% dividend payout ratio.

Heading Into Busy Season With Improved Interest Rates

Retail stores often thrive during the end-of-year holiday shopping period, as consumer typically increase their spending levels. Add to this the recent Federal Reserve announcement of greater-than-expected interest rate cuts and consumers may find that they are even more compelled to spend in the final quarter of the year. The retailers above stand to benefit in this scenario, potentially continuing their upward trends established in recent quarters.