A discouraging retail sales report has created new worries for investors. In December, the central bank had mentioned that strong retail sales were one of the reasons for its decision to raise rates after a seven-year hiatus.

However, there are still some bright spots in retail which offer great choices for the discerning investor. A strong jobs market and other positive economic indicators mean that it still makes good sense to add such stocks to your portfolio.

Feb Sales Fall, Jan Data Revised Downward

According to the Commerce Department, retail sales declined 0.1% in February, in line with the consensus estimate, to $447.3 billion. Even so, the metric registered a 3.1% year-over-year increase. What was particularly disappointing was the downward revision to January’s data. Retail sales for January were revised downward from an initial estimate of a 0.2% increase to a 0.4% decline.

Of the 13 categories, 8 experienced lower sales last month. Sales for furniture stores slipped 0.5% while electronics and appliance store sales fell 0.1%. However, auto-related categories were the major losers over the month. Gasoline station receipts were understandably 4.4% lower. At the same time, motor parts and vehicle dealers experienced a 0.2% decline in sales.

Bright Spots amid Gloom

But it wasn’t doom and gloom for the retail sector. Sales at food services and drinking places increased 1% over the last month and experienced a 6.4% year-over-year increase. Building material and garden equipment and supplies dealers’ sales jumped 12.2% year over year. Additionally, clothing and accessories store sales increased 0.9% while sporting goods, hobby, book and music stores witnessed 1.2% growth in sales.

Meanwhile, another report showed that PPI declined 0.2% following a 0.1% increase in January. Following these two sets of data, several economists have raised questions about the state of the economy. However, there are other reports suggesting otherwise. Personal consumption expenditure price index (PCE) increased 1.3% year over year in January, the highest gain since Oct 2014. Data on the ISM manufacturing and services index as well as construction spending has also been encouraging.

Moreover, the labor market continues to exhibit considerable strength. The U.S. economy created a total of 242,000 jobs in February, significantly beating the consensus estimate of 194,000. The tally was also considerably higher than January’s upwardly revised figure of 172,000. Jobs grew across several sectors including retail trade and food services and drinking places.

Meanwhile, the unemployment rate in February was in line with the consensus estimate and January’s level of 4.9%. Even though average hourly earnings declined 0.1% or 3 cents in February from the preceding month’s figure to $24.80 per hour, the metric witnessed a 2.2% rise from the year-ago figure.

Our Choices

Despite particularly weak data on the retail sales front, several categories continue to grow at an appreciably fast pace. Meanwhile, several indicators suggest that the economy continues to make a slow and steady recovery.

This is why picking stocks from categories such as restaurants as well as clothing and hobby stores continues to be a prudent option. But given the prevalent situation, it is crucial that we pick winning stocks.

This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry different weights while arriving at a VGM score. 

We have narrowed down our search to the following stocks based on a good Zacks Rank and the highest VGM score.

Build-A-Bear Workshop Inc. (BBW - Snapshot Report) is an operator of specialty retail outlets offering a make-your-own stuffed animal interactive retail-entertainment experience.

Build-A-Bear Workshop has a Zacks Rank #1 (Strong Buy) and a VGM Score of A. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 13.35, lower than the industry average of 16.80. Its earnings estimate for the current year has improved by 5% over the last 30 days.

American Eagle Outfitters, Inc. (AEO - Analyst Report) is a specialty retailer of casual apparel, accessories and footwear for men and women aged 15–25 years.

American Eagle Outfitters has a Zacks Rank #1 and a VGM Score of A. The company has expected earnings growth of 12.8% for the current year. It has a P/E (F1) of 13.47, lower than the industry average of 16.30. Its earnings estimate for the current year has improved by 7.4% over the last 30 days.

Express Inc. (EXPR - Snapshot Report) is a specialty retailer of women's and men's apparel in the U.S.

Express Inc. has a Zacks Rank #1 and a VGM Score of A. The company has expected earnings growth of 16% for the current year. It has a P/E (F1) of 12.46, lower than the industry average of 16.30. Its earnings estimate for the current year has improved by 5.6% over the last 30 days.

Carrols Restaurant Group, Inc. (TAST - Snapshot Report) is an operator of more than 700 franchise outlets of the Burger King brand in the U.S.

Carrols Restaurant Group has a Zacks Rank #1 and a VGM Score of A. The company has expected earnings growth of 39.5% for the current year. Its earnings estimate for the current year has improved by 17.8% over the last 30 days.

Potbelly Corp. (PBPB - Snapshot Report) is the owner and operator of Potbelly Sandwich Works outlets across the U.S.

Potbelly Corporation has a Zacks Rank #2 (Buy) and a VGM Score of A. The company has expected earnings growth of 26.7% for the current year. Its earnings estimate for the current year has improved by 12.2% over the last 30 days.