After a decent outcome in the recent past, the slump in U.S. retail sales in the first month of the year may have reminded investors about the days when the sector was struggling to find its way out the woods. Certainly, the sector has borne the brunt of heightened online competition, lower footfall and changing consumer spending patterns but retailers have left no stone unturned to rapidly adapt to the changing retail landscape.

Let's analyze the scenario:

Steepest Decline in a Year

Per the Commerce Department, U.S. retail and food services sales fell 0.3% to $492 billion in the month of January, contrary to analysts’ expectations of 0.2% growth. This was the steepest decline in almost a year, following a revised flat reading for December. The fall was primarily due to lower sales at motor vehicle & parts as well as building material dealers.

Auto sales declined 1.3% in the month under review, according to the report. Furthermore, home building materials sales declined 2.4%. However, the bright spots were gasoline stations, clothing & clothing accessories and department stores where sales improved 1.6%, 1.2%, and 0.8%, respectively. Receipts at service stations increased on account higher gasoline prices. Meanwhile, sales at non-store retailers remained flat but increased 10.2% from the prior-year period.

Do You Really Need to Worry?

Well looking superficially, the numbers do raise concerns but a meticulous approach may help alleviate fears. Analysts cited this slump in retail sales as a temporary hitch after a sturdy holiday season. At the same time, stable economic conditions and an impressive Q4 earnings performance will certainly compose you. Further, the monthly report states that retail sales did increase 3.6% year over year.

Truly, a jump of 0.5% in the consumer price index — a key indicator of inflation trends and the data watched by the Fed — alarmed investors who begun pondering faster-than-expected rate hikes. Nevertheless, market, for now, seems to have somewhat settled trying to accommodate rising bond yields and a possible uptick in inflation with the backdrop dominated by the latest tax reform and healthy economic growth.

Favorable economic indicators along with friendlier fiscal and regulatory policies from the current regime bode well for the sector. Industry experts are of the opinion that gradual wage acceleration, a 17-year low unemployment rate, and rising consumer confidence are enough to trigger consumer spending, which accounts for more than two-thirds of U.S. economic activity. For obvious reasons, retailers are the end gainers.

With digital transformation in shopping retailers are fast adopting the omni-channel mantra to provide a seamless shopping experience, whether online or in-stores. Moreover, National Retail Federation’s recent projection of an uptick in U.S. retail sales of 3.8-4.4% this year raises optimism. Additionally, the recent cut in corporate tax rate will allow retailers to channelize the surplus money toward best possible alternatives.

We have identified four stocks from the Retail-Wholesale sector — occupying the top 13% (2 out of 16) position in the list of 16 Zacks sectors — based on a favorable combination of a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a Growth Score of A or B. These stocks are backed by sound fundamentals, surging share price and a track record of better-than-expected results. Not only this, these stocks have outperformed their respective industries.

4 Prominent Picks

RH (RH - Free Report), a home furnishing retailer, is a lucrative option. The stock has a long-term earnings growth rate of 20% and Growth Score of A. We note that in a year, the stock has soared more than 200%, while the industry has advanced 14.4%. It has delivered an average positive earnings surprise of 17% in the trailing four quarters. The company sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

You may also consider PetMed Express, Inc. (PETS - Free Report) with a long-term earnings growth rate of 10% and Growth Score of A. In a year, the stock has surged more than 100% and outperformed the industry’s growth of 60.7%. The operator of pet pharmacy in the United States delivered an average positive earnings surprise of 32.9% in the trailing four quarters. It sports a Zacks Rank #1.

Investors can count on The Children's Place, Inc. (PLCE - Free Report) with Growth Score of A and a long-term earnings growth rate of 9%. In a year, this Zacks Rank #2 stock has advanced roughly 48.8%, compared with the industry’s growth of 1.7%. This children's specialty apparel retailer delivered an average positive earnings surprise of 14% in the preceding four quarters.

Burlington Stores, Inc. (BURL - Free Report) , a retailer of branded apparel products, is also a solid bet with a Zacks Rank #2 and Growth Score of A. The company posted an average positive earnings surprise of 15.2% in the trailing four quarters and has a long-term earnings growth rate of 18.6%. The stock has surged 43.1% in a year and comfortably outperformed the industry’s increase of 13%.