Its time again for the second-quarter reporting cycle to gain momentum. In fact, now that we are done with the earnings results from the early reporters and the late comers from the previous quarter, we will witness second-quarter earnings acquiring full impetus. So, let’s brace ourselves for the next round of earnings.

Among all the sectors, our focus in the discussion here will be the Retail-Wholesale sector.  A close look at the sector reveals that retailers continue to bear the brunt of the current challenging retail environment due to sluggish mall traffic, volatile consumer spending and increased competition from online players. We believe the impact of the slowdown in traffic trends will clearly be reflected in the diminished sales and comparable store sales (comps) numbers in second-quarter 2017.

Further, these retailers are heavily investing in eCommerce and omni-channel functionalities, which are likely to weigh on margins at least in the near term.

The data released by the Commerce Department on Jul 14 revealed that retail sales declined for the second month in a row. U.S. retail and food services sales for Jun 2017 declined 0.2% sequentially, compared with a 0.1% decline in May. The decline can be attributed to soft sales at gasoline stations, clothing retailers and department stores. Further, consumers continued to spend lower at restaurants as well as on hobbies.

Additionally, the data revealed that retail trade sales for June dipped 0.1% from May but increased about 3% from last year. While non-store retailers registered growth of 9.2% from last year, sales for the Sporting Goods, Hobby, Book, & Music Stores declined 8.9% year over year.

However, U.S. retail and food services sales improved 2.8% form Jun 2016. Moreover, total sales for second-quarter 2017 (Apr 2017 through Jun 2017) reflected a 3.8% growth from the prior-year period. The overall increase in the estimate for the second quarter could be attributed to the growing online sales, which now forms a part of core sales of most retailers.

Q2 Earnings Scorecard

Looking at the earnings scorecard of the overall S&P 500 Index so far, 30 S&P 500 members that together represent 9.3% of the Index’s total market capitalization have released second-quarter earnings results. Total earnings for these companies were up 13.8%, on 6% revenue growth. Further, about 83.3% delivered both positive earnings and revenue surprises.

While this represents only a small sample, we can ascertain that the second-quarter earnings season is surely off to a good start. More clarity on the results will be evident from the S&P members reporting earnings in the next few weeks. A look at the earnings calendar shows that we are only few days away from the reporting cycle fully taking off.

Coming to expectations, total earnings for the quarter are expected to increase 6.6% year over year, with a 4.5% jump in revenues. For the retail sector, in particular, earnings in the second quarter are expected to inch up 0.1%, with 3.7% revenue growth.

The real picture of the trend so far is visible from our latest Earnings Preview report published on Jul 15.

That said, we bring to you five retail stocks that may show promise based on their favorable Zacks Rank – Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) – and a positive Earnings ESP. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%. It makes sense to add these potential winners to your portfolio ahead of their releases. A rational investment can fetch higher returns on the heels of an earnings beat.

Our Picks

We have highlighted five stocks that not only meet the prescribed criteria but have also convincingly beaten earnings estimates in the trailing four quarters, hold excellent prospects and are therefore well positioned for future earnings growth.

McDonald's Corporation (MCD Quick QuoteMCD - Free Report) , a leading fast-food chain that currently operates over 36,000 restaurants in more than 100 countries, is a solid bet. The stock carries a Zacks Rank #2 and has an Earnings ESP of +1.23%. You may uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

The current Zacks Consensus Estimate for second-quarter 2017 is pegged at $1.63 per share, reflecting an uptrend in the last seven days. This Oak Brook, IL-based company delivered an average positive earnings surprise of 7.01% in the trailing four quarters, and has a long-term earnings growth rate of 9.3%. The company is scheduled to report results on Jul 25.

We also suggest investing in Amazon.com, Inc. (AMZN Quick QuoteAMZN - Free Report) , one of the largest online retailers, with extensive operations in North America, now expanding globally. The company carries a Zacks Rank #3, a long-term earnings growth rate of 27.5% and an Earnings ESP of +13.77%. The current Zacks Consensus Estimate for second-quarter fiscal 2017 is pegged at $1.38 per share, which has been stable in the last 30 days. This Seattle, WA-based company delivered an average positive earnings beat of 17.8% in the trailing four quarters. The company is expected to report results on Jul 27.

Investors can also count on Dollar General Corporation (DG Quick QuoteDG - Free Report) , one of the largest discount retailers in the U.S. that trades in low priced merchandise typically $10 or less. The company has an Earnings ESP of +0.94% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

The current Zacks Consensus Estimate for second-quarter fiscal 2017 is pegged at $1.07 per share. This Goodlettsville, TN-based company registered an average positive earnings surprise of 1.4% in the preceding four quarters, and has a long-term earnings growth rate of 10.6%. The company is anticipated to report results on Aug 24.

The Gap Inc. , a premier international specialty retailer offering a diverse range of clothing, accessories, and personal care products for men, women, children as well as infants also holds promise. The company carries a Zacks Rank #3 and an Earnings ESP of +1.92%. The current Zacks Consensus Estimate for second-quarter fiscal 2017 is pegged at 52 cents. This San Francisco, CA-based company registered average positive earnings surprise of 6.5% in the trailing four quarters, and has a long-term earnings growth rate of 8%. The company is slated to report results on Aug 17.
 
Last but not the least is Nordstrom Inc. (JWN Quick QuoteJWN - Free Report) , with a Zacks Rank #3 and an Earnings ESP of +4.92%. The current Zacks Consensus Estimate for second-quarter fiscal 2017 is pegged at 61 cents a share. This Seattle, WA-based fashion specialty retailer offers high-quality apparel, shoes, cosmetics and accessories for men, women and kids.  The company registered an average positive earnings surprise of 40.8% in the trailing four quarters, and has a long-term earnings growth rate of 6%. The company is scheduled to report results on Aug 10.
 
Bottom Line
 
We believe that the above stocks with strong fundamentals and growth prospects are capable of meeting investor expectations. Your portfolio’s chance of giving higher returns increases if you have a favorably ranked stock powered by the optimism of earnings beat in the upcoming quarter.

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