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These are the potential winners and sinners in the retail sector this reporting season

This reporting season will be a nail-biter for consumer-facing companies as there are few other sectors on a knife-edge like retail with the industry facing disruption and an uncertain operating outlook.

I think the gap between those that can prove their resilience and those who can’t will widen this month when listed companies hand in their profit results and issue an outlook statement.

Knowing the right horse to back in August will be key if you want to beat the market and there are a few retail-exposed stocks you might want to avoid in the near-term.

The first one that I think could disappoint is Coca-Cola Amatil Ltd (ASX: CCL). The stock has performed very well with its share price rallying 13% this calendar year compared to the 4% gain on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.

I think the stock is starting to look expensive and that leaves little room for bad news at its results. But the risk of disappointment is growing with some brokers noting that the quarterly profit announcement from the NYSE-listed mothership, The Coca-Cola Co, suggested that growth in markets under the ASX-listed entity will be weak (click here for more details).

Another consumer-facing company at risk of disappointing the market is pizza delivery group Domino’s Pizza Enterprises Ltd. (ASX: DMP).

Some steam has been coming out of its share price recently but its share price is still up a robust 16% since the end of the last reporting season in February.

I think the market may be anticipating a small earnings miss with management targeting a 20% increase in profit for FY18, but the thing that could trigger a sell-off is its outlook for FY19.

If Domino’s can’t hit 20% in the last financial year, it could suggest a lower growth rate for the current year, although acquisition opportunities could bolster its earnings outlook. Nonetheless, I would take profit on the stock now and look to buy in after its results if management can pull a rabbit out of its hat.

On the flipside, homewares and home furnishing retailer Adairs Ltd (ASX: ADH) is a favourite among analysts with all four brokers covering the stock rating it a “buy”, according to data on Reuters.

Adairs upgraded its earnings guidance in April with the group expected to deliver sales of between $310 million and $315 million and earnings before interest and tax of $44 million to $46.5 million for the year ended June 30, 2018.

Morgans thinks management can hit the top end of its guidance, which will put its results slightly ahead of consensus.

“ADH is cycling strong comps for the first time in c12 months and therefore consensus is factoring in benign growth in FY19,” said the broker.

“If ADH produces LFL [like-for-like] sales growth of at least c3.5/4%, we think the stock will be rewarded.”

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Coca-Cola Amatil Limited and Domino's Pizza Enterprises Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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