1 Retail Stock to Pick Up and 1 to Avoid Soaring Inflation and supply chain disruptions have significantly dampened the retail sector's growth this year. Amid slowing consumer demand, we think investors should invest in Walmart (WMT) since it possesses...

Soaring Inflation and supply chain disruptions have significantly dampened the retail sector's growth this year. Amid slowing consumer demand, we think investors should invest in Walmart (WMT) since it possesses enough fundamental strength to withstand an economic downturn. On the contrary, Honest Company (HNST) should be avoided now, given its bleak growth prospects. Read on to learn more….

Internet retail stocks were impacted severely after the Federal Reserve's 75 basis-point interest earlier this month, which was the largest increase since 1994. Inflation came as a significant headwind in the retail sector in May since industry leaders reported the impact of higher costs on their operations.

This also created anxieties among the investors, and as a result, some of America's largest retailers saw the biggest declines in their stock prices since the market crash of 1987. The Federal Reserve's predictions for higher unemployment and gas prices have also contributed to the industry's weak stock market performance.

Nevertheless, consistent consumer spending on non-discretionary items could help the sector rebound quickly. Walmart Inc.'s (WMT) robust financials, various collaborations, and impressive growth attributes should help it survive the industry challenges. It could be wise to buy the stock now.

However, not all retail stocks possess the requisite fundamentals to withstand the current turbulent market scenario. We think The Honest Company, Inc. (HNST) is best avoided now, given its weak financials and poor growth prospects.

Stock to Buy:

Walmart Inc. (WMT)

WMT is engaged in the operation of retail, wholesale, and other units worldwide. The company has three operational segments: Walmart U.S.; Walmart International; and Sam's Club. It operates supercenters, supermarkets, hypermarkets, warehouse clubs, cash and carry stores, and discount stores.

WMT and Memomi, an augmented reality (AR) optical tech company, recently announced that they have agreed for WMT to acquire Memomi. This strengthens WMT's commitment to frictionless and omnichannel optical care. Since 2019, Memomi has enabled digital measurements for all Walmart and Sam's Optical customers across more than 2,800 Walmart Vision Centers and 550 Sam's Clubs and also powers the Optical eCommerce experience on SamsClub.com.

This month, WMT and Roku, Inc. (ROKU) announced a one-of-its-kind partnership to make TV streaming the next e-commerce shopping destination. WMT will be the exclusive retailer to enable streamers to purchase featured products fulfilled by Walmart directly on Roku, America's #1 TV streaming platform

Also, last month, Symbotic LLC, a profound A.I.-powered supply chain technology company, WMT announced an expanded commercial agreement to integrate Symbotic's robotics and software automation platform in all 42 of WMT's regional distribution centers over the years ahead.

In the first quarter ending March 31, 2022, WMT's total revenues increased 2.4% year-over-year to $141.57 billion. Its operating income amounted to $5.32 billion, while its net income amounted to $2.05 million. The company's non-GAAP EPS came in at $0.74. The stock has declined 4.7% over the past month.

The $1.82 consensus EPS estimate represents a 2.1% improvement year-over-year for the second quarter ending July 2022. Analysts expect WMT's revenue to increase 5.5% year-over-year to $147.57 billion for the quarter. Moreover, the company has an impressive earnings surprise history, as it surpassed the consensus EPS estimates in three of the trailing four quarters.

WMT's POWR Ratings reflect this promising outlook. The company has an overall B rating, which translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

The stock also has a B grade for Growth. Within the A-rated Grocery/Big Box Retailers industry, it is ranked #17 of 38 stocks.

To see additional POWR Ratings for Sentiment, Value, Momentum, Quality, and Stability for WMT, click here.

Stock to Avoid:

The Honest Company, Inc. (HNST)

HNST manufactures and sells diapers, wipes, skin and personal care, and household and wellness products. The company also provides baby clothing and nursery bedding products. It sells its products through digital and retail sales channels, such as its website, third-party e-commerce sites, and brick-and-mortar retailers.

During the first quarter ending March 31, 2022, HNST's revenue declined 15.2% year-over-year to $68.72 million. Its operating loss grew 251.8% from its year-ago value to $14.55, while its net loss increased 226.2% from its prior-year quarter to $14.63 million. The company's loss per share increased 23.1% year-over-year to $0.16.

The consensus EPS estimate is expected to decline in the second quarter ending June 2022. The company's shares have fallen 82.2% over the past year and 72.1% over the past nine months.

HNST's weak fundamentals are reflected in its POWR ratings. The stock has an overall D rating, which equates to Sell in our POWR Ratings system. The stock also has an F grade for Sentiment and a D for Stability. In the C-rated Consumer Goods industry, it is ranked 54 of 61 stocks.

In addition to the POWR Ratings grades I have just highlighted, you can see the HNST's rating for Quality, Value, Growth, and Momentum here.

WMT shares were trading at $121.95 per share on Thursday afternoon, up $0.03 (+0.02%). Year-to-date, WMT has declined -15.08%, versus a -19.44% rise in the benchmark S&P 500 index during the same period.

About the Author: Spandan Khandelwal

Spandan's is a financial journalist and investment analyst focused on the stock market. With her ability to interpret financial data, she aims to help investors evaluate the fundamentals of a company before investing.

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