The holiday-shopping season has officially begun, but there is an underwhelming sentiment in the air. As consumers tighten their belts, analysts are urging investors to be selective when it comes to retail stocks.
Online Sales Surge, In-Store Growth Slows
While online spending continues to gain momentum, it seems to come at the expense of in-store sales growth, which is expected to be more moderate. D.A. Davidson analyst Michael Baker predicts a modest holiday sales growth this year, with expectations in the low-single-digit range. If this pans out, it would be the smallest increase observed since 2016.
Fierce Competition and Heavy Discounts
With the anticipated slowdown in sales growth, retailers will face even fiercer competition. Investors will need to closely monitor which brands are resorting to heavy discounting. Apparel companies, in particular, might face a tough road ahead.
Top Picks: TJX and Abercrombie & Fitch
According to analysts at Jefferies, off-price retailer TJX (ticker: TJX) and clothing chain Abercrombie & Fitch (ANF) are well-positioned to navigate these challenges.
Jefferies analyst Randal Konik highlights the increasing pressure faced by lower-income consumers, particularly due to the resumption of student-loan repayments. In such a climate, these consumers are looking to maximize their savings. With its focus on value, TJX appears to be a solid option. Jefferies has set a target price of $110 for TJX and rates it as a Buy. As of Monday’s premarket trading, the stock was down 0.5% at $89.50.
On the other hand, Abercrombie & Fitch offers a different value proposition by catering to customers who are less affected by the financial strain on lower-income consumers. Jefferies notes that the company has successfully made full-price sales and has offered a holiday discount of 25% off everything for its core brand this year, compared to 30% off the previous year. Jefferies has a Buy rating and a target price of $85 on Abercrombie & Fitch stock. As of premarket trading, shares were down 1.1% at $72.51.
Conclusion
As the holiday-shopping season unfolds, retail stocks face challenges amidst a cautious consumer sentiment. Investors should consider the shifting dynamics between online and in-store sales, as well as the potential impact of heavy discounting on the apparel industry. TJX and Abercrombie & Fitch emerge as two stocks to watch, with their unique strategies tailored to different market conditions.