The consumer discretionary industry, which includes apparel retailers and restaurant and hotel operators, has been enjoying investor attention amid the economic recovery period thanks to pent-up demand and rising consumer spending. While the resurgence of the COVID-19 cases due to the rapid spread of the Delta variant continues to worry investors, continued interest in the consumer discretionary industry is evident from the Consumer Discretionary Select Sector SPDR ETF’s (XLY) 5.9% gains over the past three months.

According to the Labor Department, the consumer price index (CPI) in August increased 5.3% from a year earlier and 0.3% from July, which was less than expected, signaling that inflation may be starting to cool. Furthermore, during the Federal Reserve’s recent, annual Jackson Hole economic symposium, Fed Chair Jerome Powell reiterated that high inflation is “temporary.” The economy’s management  of inflation should boost the performance of the consumer discretionary sector.

So, we think it could be wise to bet on quality consumer discretionary stocks Yum! Brands, Inc. (YUM), Ulta Beauty, Inc. (ULTA), LKQ Corporation (LKQ), and Under Armour, Inc. (UAA).

Yum! Brands, Inc. (YUM)

Famous fast-food company YUM, which is based in Louisville, Ky., has more than 50,000 restaurants across more than 150 countries and territories. The company operates through four segments: the KFC Division, the Pizza Hut Division; the Taco Bell Division; and the Habit Burger Grill Division.

YUM acquired Dragontail Systems Limited on September 7. It is an innovative provider of technology solutions for the food industry. The acquisition is expected to help strengthen YUM’s global order management and delivery capabilities.

The company’s sales surged 34% year-over-year to $1.60 billion for the second quarter, ended June 30, 2021. YUM’s operating profit grew 89% year-over-year to $567 million, while its net income came in at $391 million, representing an 89% year-over-year increase. Its EPS was  $1.29, up 91% year-over-year.

Analysts expect YUM’s EPS and revenue to increase 25.1% and 16.4%, respectively,  year-over-year to $4.53 and $6.58 billion in its fiscal year 2021. In addition, it surpassed the Street’s EPS estimates in each of the trailing four quarters. The stock has gained 39.9% in price over the past year to close yesterday’s trading session at $129.05.

YUM’s POWR Ratings reflect solid prospects. The company has an overall B rating, which translates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

In addition, it has an A grade for Quality. Click here to see the additional POWR Ratings for YUM (Value, Stability, Growth, Sentiment, and Momentum). YUM is ranked #21 of 44 stocks in the A-rated Restaurants industry.

Ulta Beauty, Inc. (ULTA)

Beauty products retailer ULTA’s stores offer cosmetics, fragrances, skincare and haircare products, bath and body products, and salon styling tools. It distributes its products through its website, ulta.com, and mobile applications. ULTRA is headquartered in Bolingbrook, Ill.

In July, ULTA and Target Corporation (TGT) shared details about the highly anticipated ULTA at TGT, which is slated to begin rolling out in more than 100 TGT stores nationwide and online with more than 50 specially curated prestige brands. Kecia Steelman, ULTA’s COO, said, “Ulta Beauty at Target reflects our commitment to drive the industry forward and keep our guests meaningfully engaged.”

ULTA’s net sales surged 60.2% year-over-year to $1.97 billion for its  fiscal second quarter, ended July 31, 2021. The company’s operating income grew 2,505.3% year-over-year to $332.31 million, while its net income came in at $250.89 million, representing a 3,015.9% year-over-year increase. Its EPS was$4.56, up 3,157.1% year-over-year.

For its fiscal year 2021, analysts expect ULTA’s EPS and revenue to increase 220.6% and 35.2% year-over-year to $14.94 and $8.32 billion, respectively. In addition, it surpassed the consensus EPS estimates in each of the trailing four quarters. The stock has gained 62.6% in price over the past year to close yesterday’s trading session at $372.29.

ULTA’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to a Buy in our proprietary rating system. In addition, it has an A grade for Quality, and a B grade for Growth and Sentiment.

Click here to access ULTA’s ratings for Stability, Value, and Momentum as well. In addition, ULTA is ranked #7 of 40 stocks in the B-rated Specialty Retailers industry.

LKQ Corporation (LKQ)

Chicago’s LKQ distributes replacement parts, components, and systems used in the repair and maintenance of vehicles. The company operates through three segments: North America; Europe; and Specialty. It also operates self-service retail operations under the LKQ Pick Your Part name, and designs, manufactures, and markets vehicle equipment and accessories.

On May 25, LKQ announced that it had acquired the business and assets of Green Bean Battery LLC. Justin Jude, President of North America Wholesale Operations of LKQ, said, “This acquisition reinforces our ongoing commitment to expand our parts and services offerings to meet the demands and opportunities that arise from technological changes in the automobile industry.”

LKQ’s revenue surged 30.8% year-over-year to $3.43 billion for its fiscal second quarter, ended June 30, 2021. In addition, the company’s operating income grew 93.3% year-over-year to $816.12 million. Its adjusted net income came in at $340.09 million, representing a 110.6% year-over-year increase. Also, its adjusted EPS was  $1.13, up 113.2% year-over-year.

LKQ’s EPS and revenue are expected to increase 44.3% and 11.5%, respectively, year-over-year to $3.68 and $12.97 billion in its fiscal year 2021. In addition, it surpassed Street EPS estimates in all the trailing four quarters. Over the past year, the stock has gained 58.4% in price to close yesterday’s trading session at $50.95.

LKQ’s POWR Ratings reflect this promising outlook. The company has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.

The stock has a B grade for Growth, Sentiment, and Quality. Within the B-rated Auto Parts industry, LKQ is ranked #8 of 67 stocks. Click here to see the additional POWR Ratings for LKQ (Momentum, Stability, and Value).

Under Armour, Inc. (UAA)

UAA develops, markets, and distributes branded performance apparel, footwear, and accessories for men, women, and youth. The company offers its apparel in compression, fitted, and loose types. It also provides various footwear products for running, basketball, cleated sports, slides, training, and outdoor.

On August 3, UAA President and CEO Patrik Frisk said, “With the critical mass of our transformation behind us and the continued improvements across product, marketing, and our financial results, I believe this year sets a robust foundation that positions us well for our next chapter of profitable growth.”

The company’s total revenue surged 91% year-over-year to $1.35 billion for the second quarter, ended June 30, 2021. UAA’s income from operations was  $121.20 million, compared to a $169.67 million operating loss in the prior year’s quarter. Its net income came in at $59.21 million, compared to a $182.89 million loss in  the year-ago period. Also, its EPS for the quarter came in at $0.13, versus a $0.40 loss per share in the previous year.

UAA’s EPS and revenue are expected to increase 315.4% and 23.5%, respectively,  year-over-year to $0.56 and $5.53 billion in its fiscal year 2021. In addition, it surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 93.6% in price to close yesterday’s trading session at $21.92.

It’s no surprise that UAA has an overall B rating, which equates to a Buy in our POWR Rating system. In addition, the stock has an A grade for Growth, and a B grade for Momentum, Sentiment, and Quality.

Click here to see UAA’s ratings for Stability and Value also. UAA is ranked #11 of 35 stocks in the A-rated Athletics & Recreation industry.

YUM shares were trading at $128.77 per share on Tuesday afternoon, down $0.28 (-0.22%). Year-to-date, YUM has gained 20.13%, versus a 19.47% rise in the benchmark S&P 500 index during the same period.

About the Author: Nimesh Jaiswal

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles. More...

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