Top 3 Retail Stocks Defying the Earnings Trend: AEO, PLAY, ROST

Key Points

• Adjusted for inflation, retail sales numbers are down year-over-year.
• Many retailers are lowering their guidance, which is reflected in their stock prices.  
• These three retailers are outperforming the sector and may start to outperform the broader market.

One of the most closely watched economic indicators is the monthly report on retail sales. In June 2024, the May numbers were reported. After being negative in April, retail sales were up 1.2% month-over-month and 2.88% year-over-year.  

So why didn't you hear the sound of champagne corks popping? There's more to the story. While encouraging, those numbers are not adjusted for inflation, which still runs at around 3.3%.  

That means actual retail sales were negative not only in May but every month for the last year. The takeaway is that consumers are closing their wallets for discretionary purchases. And that's what you're hearing from retailers issuing weak guidance for the stocks of these companies, which continue to lag in the market.  

While you might think this is only a problem for low—to middle-income consumers, you would be wrong. Even premium brands like Lululemon Athletica Inc. NASDAQ: LULU are lowering their forecasts due to unexpected weakness.  

But there are winners to be found in any market, and that's the case with these three retail stocks, which are currently beating earnings estimates and continuing to issue bullish forecasts.  

AEO: This High-Flying Mid-Cap Stock is Ready to Move Higher 

American Eagle Outfitters Inc. NYSE: AEO is a specialty retailer that houses its signature American Eagle brand and Aerie, offering intimate and lifestyle apparel lines. At a time when many retailers are struggling to post increased same-store sales, American Eagle is holding its own. In the company's first quarter, Aerie's same-store sales were up 7% year-over-year, and American Eagle retail stores posted an 8% year-over-year gain. 

Despite the positive numbers, AEO stock is down over 10% since the report. However, with AEO stock up 58% in the last 12 months, this looks like a healthy pullback that could set the stage for another higher move.  

One key to making that happen will be to see if the company can maintain its margins on Aerie, which tends to carry a higher price. The American Eagle analyst forecasts on MarketBeat give AEO stock a consensus Hold rating but with a price target of $25, a 29.5% upside from the stock's closing price on July 3, 2024.

Investors Have an Opportunity to Buy an Unappreciated PLAY Stock 

In many cases, investors sell the news regarding earnings reports. It can be seen as better to sell first and reconsider later. That appears to be the situation with Dave & Buster's Entertainment Inc. NASDAQ: PLAY. The headline numbers on the company's earnings report were bad. And PLAY stock is down over 20% since the report. However, as Thomas Hughes wrote for MarketBeat, Dave & Buster's Entertainment is in the middle of executing a growth strategy that involves opening new stores and expanding internationally.  

However, to be fair, this wasn't the first quarter that Dave & Buster's missed analyst expectations on the top and bottom lines. It was actually about the fifth quarter in a row that the company missed expectations.  

This is where the opportunity lies. Revenue and earnings are lower year-over-year but still well above five-year levels. But the PLAY stock price is about where it was five years ago. That suggests that investors have oversold the stock. That's what the analysts believe. They have a Moderate Buy rating on the stock with a $65.71 price target, a gain of over 70%.

ROST: Will the Third Time be the Charm for This Retailer's Stock? 

As inflation continues to impact consumers, many investors are taking the temperature of discount retailers like Dollar General Co. NYSE: DG. They may be better served looking at a company like Ross Stores Inc. NASDAQ: ROST.  

For starters, the company has a loyal customer base that seeks out the company as a place where they can "Dress For Less," which means they can get name-brand merchandise at deep discounts. That's reflected in revenue and earnings that are up year-over-year and continue to beat analysts' expectations.  

Just as consumers like to buy items on sale, investors love a stock that shows expanding margins and rising cash flow. Although ROST stock has been up 29.5% over the last 12 months, resistance has been found to be right around the $150 stock price on two different occasions.  

If the company can continue to beat earnings estimates as the Federal Reserve begins to make monetary policy more accommodating, the third time may be the charm for ROST stock.