Unless you’ve been staying at home eating the BRAT (bananas, rice, applesauce, toast) diet for every meal, you’ve likely taken notice of higher prices in everything from gas at the pump to inflated menu pricing at restaurants. But have rising costs limited consumer spending?

The U.S. Census Bureau reported this morning that sales at U.S. retailers rose 0.5% in March. While the measure fell slightly short of the expected 0.6% advance, Easter will occur later than usual this year and will shift some spending that normally would have taken place in March into April.

The February data point was also revised upward to show a 0.8% increase instead of the previously reported 0.3%. Spending is still well above pre-pandemic levels. Retail sales broadly rose 6.9% from a year ago, while inflation surged 8.5% over the same period – the highest level since 1981.

Americans are still buying lots of goods and services. In fact, domestic retail sales recently hit an all-time high. Meanwhile, consumer sentiment is at its lowest level in over a decade. The graphs below detail the divergence between retail sales and consumer sentiment.

Image Source: U.S. Census Bureau, St. Louis Federal Reserve

Image Source: U.S. Census Bureau, St. Louis Federal Reserve

For the last ten years these measures have mainly moved in sync, with retail sales normally serving as a reflection of how consumers feel. This past year has been different. Consumers are obviously worried about higher inflation as the sentiment graph depicts. However, that hasn’t yet caused them to reduce spending. The pent-up demand created from the pandemic is still very much in play, with retail sales continuing to soar even in the face of higher prices. Americans aren’t happy about rising prices, but they’re still pulling out the wallet to spend.

Part of this rise in U.S. retail sales is simply due to higher prices (particularly at the pump), but real retail sales are still 15% higher than pre-pandemic levels. This illustrates that demand remains strong regardless of higher inflation.

Image Source: YCharts

While inflation continues to surge, the most recent CPI report did show some signs of the rise in prices beginning to wane. The question is – what pockets of the market can we as investors profit from in order to take advantage of this environment?

This morning’s report showed that clothing sales rose 2.6%, while sales at general merchandise stores rose 5.4% for the month. Furniture and home furnishings stores posted sales figures of $12.86 billion, up 0.7% from February’s $12.77 billion. March’s figures were up 3.6% relative to the same period last year. If inflation is nearing a peak, that would translate into higher consumer spending on these items.

The Zacks Retail – Regional Department stores industry group is currently ranked in the top 3% out of approximately 250 industries. Because it is ranked in the top half of all Zacks Ranked Industries, we expect this group to outperform over the next 3 to 6 months. Also note the favorable valuation characteristics for this group:

Image Source: Zacks Investment Research

Digging a bit deeper, this industry has a +12.23% return year-to-date versus a -6.35% loss for the S&P 500. Quantitative research studies have shown that approximately half of a stock’s future price appreciation is due to its industry grouping. Let’s examine a top stock that is a component of this leading industry.

Dillard’s, Inc. (DDS Quick QuoteDDS - Free Report)

Dillard’s operates retail department stores where it offers merchandise, cosmetics, home furnishings, and other consumer goods. DDS is also one of the nation’s largest fashion retailers. The company operates approximately 280 stores as well as an online presence. Dillard’s was founded in 1938 and is headquartered in Little Rock, AR.

DDS has exceeded earnings estimates in each of the past seven quarters. The retailer most recently reported Q4 EPS back in February of $15.68, a +79.2% surprise over the $8.75 consensus estimate. DDS has posted a trailing four-quarter average earnings surprise of +294.48%, helping push the stock nearly 218% higher in the past year.