The retail sector could be facing a brighter outlook as signs of positivity have begun to emerge. The economy continues to struggle with inflation and a strong employment market. Those factors have led the Federal Reserve to hike rates at unprecedented speed. But a slowdown in wage growth signals that the Fed’s efforts are having their intended effect. Slowing wage growth means the Fed may be able to slow its aggressive actions lessening the chances of a more severe downturn. In turn, normalization is possible paving the way for undervalued retail stocks to return. 

Consumerism is a vital part of the U.S. economy. The data suggests that consumers continue to be well-funded due to excess savings accumulated during the pandemic. According to JPMorgan Chase (NYSE:JPM), between $1.2 to $1.8 trillion of the $2 to $2.4 trillion in excess savings accumulated during the pandemic remains.

This glut of excess savings should help boost these seven undervalued retail stocks.

January’s Undervalued Retail Stocks: Academy Sports and Outdoors (ASO) 

Academy Sports and Outdoors (NASDAQ:ASO) is an outdoor recreation and sporting goods retailer that originated in Texas and has expanded to 18 states. 

The company continues to grow relative to pre-pandemic business levels. The company exceeded its pre-pandemic performance on all major fundamental measures. That said, the company recently reported Q3 earnings including sales of $1.49 billion, 6.2% lower on a year-over-year basis. 

Despite the decline in sales, the company raised its EPS guidance for the full year. That should signal to investors that the company believes it has turned the corner, perhaps along with the broader economy. 

Academy Sports and Outdoors continues to expand its eCommerce operations with sales increasing 10.5% during the quarter. That represented the fifth consecutive period in which it recorded double-digit eCommerce sales growth. 

Another strong sign from the company comes in the form of operating income. ASO’s operating income through the first three quarters of 2022 surpassed its combined total operating income from fiscal years 2019 and 2020. 

Lululemon (LULU)

Investors ought to recognize Lululemon (NASDAQ:LULU) stock for the bargain it is. Its share prices remain muted despite its strong performance. Lululemon simply continues to improve along all of the important fundamental measures. But the specter of recession and reduced economic activity continue to drag it down. 

Investors should concern themselves with the fact that Lululemon has done extraordinarily well in a difficult 2022. It saw revenue increase by 28% during the period. North American revenues increased by 26% while international revenue growth reached 41%.  

Lululemon’s net income increased by 36% in both the third quarter and through the first nine months of the year. 

Investors should expect the company to continue to do well moving forward: It has the intention to double 2021 revenues from $6.25 billion to $12.5 billion by 2026. Despite those aggressive growth plans, the company continues to direct cash away from growth directives, instead rewarding investors by repurchasing 54.6 thousand of its own shares.

January’s Undervalued Retail Stocks: TJX Companies (TJX) 

TJX Companies (NYSE:TJX) is doing a strong job of dealing with overarching difficulties. That strong performance translated to stronger-than-anticipated earnings. Given recent strong news about wage growth, TJX should again find its way onto investors’ radars. 

TJX continued to grow through the first nine months of 2022. It reported both top-line revenue growth and bottom-line net profit growth. That is laudable in what was a tough year for every sector outside of energy. But what’s really impressive about TJX is its performance in Q3. Because while sales declined 2.9% YoY to $12.166 billion, the company eeked out higher profits. The company saw net income increase by 3.91%, rising to $1.062 billion in Q3. Making more profit out of smaller revenues is not an easy task.    

The company’s holiday season performance remains to be seen. Speaking anecdotally, they may have been strong as I personally shopped at T.J. Maxx and Home Goods. My personal experience remains irrelevant but its Q3 performance does not. 

Coupang (CPNG) 

Coupang (NASDAQ:CPNG) stock was a Wall Street darling for a brief moment during its initial public offering (IPO). Then the realities of the company became more apparent and it fell dramatically costing many investors significant sums of capital in the process. But it has reached a significant turning point in a relatively unnoticed fashion. That leaves it undervalued currently while it continues to grow rapidly. 

The South Korean e-commerce giant was a massive failure following its IPO. Mania ensnared the company’s U.S. debut when it raised prices from the high $20s to the mid $30s just prior to its IPO. Suddenly its pre-IPO prices shot up to $60 before debuting at $48. They would only continue to fall thereafter. Investors were enamored with its impressive growth but had ignored its consistent and significant losses well into the hundreds of millions. 

It basically fell off the radar because of those losses. But the company posted a respectable net income of $91 million in Q3 on $5.1 billion in revenues. The company is now profitable for the first time in its publicly-traded life. Investors haven’t caught on because the company doesn’t command much media coverage. That makes it a diamond in the rough worth buying.

January’s Undervalued Retail Stocks: Target (TGT)

Target (NYSE:TGT) stock remains undervalued by Wall Street and others. Analysts with coverage believe TGT stock has roughly $15 of upside beyond its current $160 price. Pure fundamental research site Gurufocus pegs TGT stock’s value at a significantly higher: $228.

TGT stock remains discounted after disappointing third-quarter results. The firm’s growth was lacking relative to larger rivals and demand miscalculations led to excess inventory. Inflation and recession concerns only hurt Target further late in 2022. 

That raises a question for investors: Is Target likely to rebound in the future, or have a few missteps in 2022 sent it into long-term decline? If you agree with the former notion, there’s a lot to like about Target. Its 3-year revenue growth rate of 15% is near the top 10% of all retailers. It is particularly impressive in consideration of company size. Target’s EBITDA growth during the same period of 25.1% is also impressive and suggests there’s little to worry about overall.

Advance Auto Parts (AAP)

If you follow the advice of Cox senior economist Charlie Chesbrough, Advance Auto Parts (NYSE:AAP) stock appears to be a strong buy. 

Chesbrough believes there will be no appreciable uptick in U.S. auto sales in 2023 due to affordability. He believes that the only factor that could increase sales is a decision by auto executives to lower prices. But many auto execs have vowed not to offer such discounts at the risk of decreasing profitability.

That implies that the aging U.S. vehicle fleet will continue to age further in 2023. In turn, Advance Auto Parts should see strong demand as those older vehicles break down more often.

Advance Auto Parts has essentially held steady from a fundamental business perspective during 2023. Its top-line expectations did not change between Aug. 24 and Nov. 15. However, EPS guidance did fall lower. Regardless, the company has a powerful catalyst in its favor and that makes it investment worthy currently.

January’s Undervalued Retail Stocks: Farfetch (FTCH)

Rounding out this list of undervalued retail stocks is Farfetch (NYSE:FTCH), a rapidly growing e-commerce luxury platform. Although the company hasn’t experienced that same rapid growth of late, its outlook remains positive. 

The company’s most recent earnings release shows that the company’s revenues increased moderately, by 1.9%, to reach $593.36 million. That growth rate is far slower than the 28% 3-year revenue growth rate the company experienced. 

But experts remain positive about the outlook for the firm as that rapid growth has allowed the company to remain on track to double over the last three years. 

The company is expected to reach a breakeven point by the end of this year. Analysts remain upbeat on the luxury platform the e-commerce firm has developed. It sells high-ticket designer items that boast high margins. The company itself posted a gross profit margin of 44.9% in Q3 and will benefit from secular trends that favor luxury goods. FTCH stock trades below $5 but carries an average target price near $12. 

On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.