An encouraging increase in retail sales was among the major positives the market received last week. While auto sales continue to dominate these numbers, strength was seen in other areas as well. Coming in second place was growth in sales at healthcare stores. This is a significant development, and there are factors at work which may help sustain this trend over the long term.
Retail Sales Surge
The U.S. Department of Commerce reported that seasonally adjusted sales of retail and food services rose 0.6% in August, its biggest gain in four months. This rise in retail sales in August was more than the consensus forecast of it rising by 0.5%.
The gain was led by increase in demand for auto sales. Sales at auto dealers jumped 1.5%, its biggest rise since March. Auto sales increased 9.5% from the same period last year. This was followed by sales at healthcare stores, which increased by 8.1% from August 2013. Excluding motor vehicles sales, retail sales increased at 0.3%.
Consumer Sentiment Improves
Additionally, the University of Michigan and Thomson Reuters’ preliminary reading of consumer sentiment touched its highest level in September since July 2013. The gauge was at 84.6 in September, which was more than the consensus forecast of an increase to 83.6.
This follows an increase in this metric during the month of August. Late last month, the Conference Board reported that the Consumer Confidence Index rose to 92.4 in August from 90.3 in July. The number was higher than the consensus estimate of 88.6. This was also the highest level since Oct 2007.
Increase in Healthcare Spending
There are strong reasons for an 8.1% increase in sales at healthcare stores. Overall, ACA or Obamacare has helped push healthcare spending upward. An aging population has also significantly contributed to healthcare spending. Most baby boomers are expected to turn 65 and older between 2012 and 2030.
Meanwhile, Americans are currently in a better position to meet medical costs thanks to the rebound in the U.S. economy. This recovery has also pushed up healthcare spending. PricewaterhouseCoopers’s Health Research Institute forecasts a 6.8% increase in healthcare spending in 2015. This is higher than the forecast of a 6.5% increase for this year.
Stocks in Focus
All these factors indicate promising times for sales at healthcare stores. As enrollment under the ACA increases and a larger number of people get coverage, business will improve for such stores. Below we present two stocks which will gain from these trends, each of which also has a good Zacks Rank.
Walgreen Co. (WAG), popularly known as Walgreens, is the largest national retail pharmacy chain in terms of revenue and profitability. As of May 31, 2014, Walgreens operated 8,683 locations in all 50 states of the U.S., the District of Columbia, Puerto Rico and Guam and the U.S. Virgin Islands, including 8,217 drugstores.
The company also operates infusion and respiratory service facilities, worksite health and wellness centers, specialty pharmacies and mail service facilities. Walgreen Co. holds a Zacks Rank #3 (Hold). The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 16.78.
CVS Health Corp. (CVS) is the largest provider of prescription and related healthcare services in the U.S. The company, one of the largest domestic integrated pharmacy service providers, operates through three business segments: Pharmacy Services, Retail Pharmacy and Corporate.
As of Jun 30, 2014, the Retail Pharmacy Segment included 7,705 retail drugstores (of which 7,647 operated a pharmacy), 17 onsite pharmacies, 860 retail health care clinics, and the online retail websites, CVS.com and Onofre.com.br. The company currently holds a Zacks Rank #3 (Hold) and has a P/E (F1) of 18.13.
The boost in retail sales displays the renewed vigor of the US economy. The fact that healthcare spending has played a key role in this case comes as no surprise, since several factors are pushing it upward. Given current trends, such gains are expected to continue going forward.
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