Three Retail Stocks to Bet on This Holiday Season

  • We expect Target, Walmart, and Costco to continue to shine this holiday season.
  • A healthy macro backdrop, shopping convenience, and value pricing make these retailers a hit among consumers.

As the holiday season begins, we think Target (TGT), Walmart (WMT), and Costco (COST) are the top three retail bets. These three companies have not only marked stellar growth but also outperformed the broader markets by a significant margin.

The reason for their outperformance stems from their ability to defend and grow their market shares amid challenges. Moreover, these three retailers continue to beat peers and generate stellar traffic growth.

Wall Street maintains a favorable outlook on Target, Walmart, and Costco stocks. The considerable growth in these retailers’ stock prices drove their valuations higher. However, we think it’s the comps growth rate that will set the direction for these retail stocks in the near term.

Mixed holiday sales growth forecast

The holiday sales growth forecast is mixed. Wells Fargo analyst Ike Boruchow doesn’t expect holiday sales to be that great. He argues that a shorter holiday shopping season and warm weather could hurt sales. Moreover, tourist spending could take a hit due to the stronger US dollar, which, in turn, could affect holiday sales numbers.

In contrast, Deloitte and AlixPartners project healthy sales growth during this holiday. For instance, Deloitte sees 4.5%–5% YoY (year-over-year) growth in holiday retail sales. Meanwhile, AlixPartners forecasts growth of 4.4%–5.3%. Moreover, Coresight Research expects holiday retail sales to grow by 3.5%–4.0% in the US.

Sales growth projections aside, we believe a robust macro backdrop in the US and the convenience of shopping is likely to drive traffic.

Higher job rates, increased wages, and a low interest and tax rate environment are likely to drive consumer spending. We believe Target, Walmart, and Costco remain in the best position to gain. The expansion of online fulfillment options, value pricing, and expanded assortments could continue to drive comparable sales for these three retailers.

Target’s phenomenal run

Target is up about 92.0% year-to-date as of November 26. The stellar bull run in the stock is the result of its digital transformation, which includes the expansion of same-day delivery capabilities.

Shoppers continue to flock to Target, as is evident in its robust comps growth over the past several quarters. During the last-reported quarter, Target’s comp sales increased 4.5%, reflecting 3.1% growth in traffic and a 1.4% rise in ticket size. The retailer was up against tough comparisons. Moreover, its comps have increased by about 10% in the last two years.

We expect Target to sustain its growth momentum during the holiday season. Earlier, the retailer said that it was hiring 130,000 temporary staff members for this holiday season. This number is about 10,000 higher than last year. The company’s holiday season hiring indicates that it expects strong sales.

We believe Target’s same-day delivery through Shipt, Drive Up, and in-store pickup will continue to drive traffic. Meanwhile, strategic promotions, efficient inventory management, and the expansion of owned and exclusive brands are expected to drive its sales.

Target rolled out free shipping on thousands of items on November 1. Moreover, compelling promotions for Black Friday and Cyber Monday should further support its traffic growth. Target’s home decor assortments will feature more than 2,000 new items this holiday season. It’s also offering 1,000 curated gifts and holiday essentials under $15. It’s also added more than 10,000 new and exclusive toys for the busiest shopping season of the year.

Target’s Drive Up services are available in all 50 states in the US. Same-day delivery with Shipt is available in 1,500 stores across 48 states, and in-store order pickup is present across all of its stores.

Walmart stock to gain this holiday

Walmart could also be one of the top retailers to benefit from higher holiday sales this year. Its low prices and expanded digital fulfillment options are likely to drive its comps. Its strategic pricing on top-selling categories, including electronics, gaming, toys, and home, is expected to drive its traffic.

During last quarter’s earnings conference call, management stated that online grocery pickup services were now available in around 3,100 stores. Moreover, grocery delivery services were available in almost 1,400 stores, and the retailer had about 1,400 pickup towers. The convenience of shopping coupled with low prices is likely to drive sales for Walmart.

Walmart’s US business is firing on all cylinders, with e-commerce expansion contributing meaningfully to the segment’s growth. Its US comps are up 6.6% on a two-year-stacked basis. Moreover, Walmart’s US comps have increased in the last 21 consecutive quarters, with traffic rising in the past 20.

The short holiday shopping season could remain a drag. However, Walmart’s inventory position, demand for private-label products, low prices, and fast delivery are likely to support its growth.

Costco could continue to outgrow peers this holiday

We expect Costco to continue to produce industry-leading comps growth. Costco’s investment in pricing widens the value gap with its competitors and, in turn, drives traffic. Moreover, its expanded assortments further support its sales growth.

Costco has been beating out its peers with its comps growth rate. Its comps growth is showing sequential acceleration despite tough YoY comparisons. Costco’s US comps remain high thanks to continued growth in both traffic and ticket size. Notably, Costco’s US comps have increased by more than 5% in the last four consecutive months.

Moreover, the company’s comps continue to outgrow both Walmart’s and Target’s comps. For instance, Costco’s US comps rose 6.2% in the last-reported quarter, with 3.6% growth in traffic. In comparison, Target’s comps increased 4.5% in the previous quarter. Meanwhile, Walmart’s US comps rose 3.2%.

Costco’s membership renewal rates were 90.9% in the US and Canada at the end of the last-reported quarter. This higher renewal rate is an encouraging sign, which implies that Costco is likely to sustain momentum. Analysts expect Costco’s top line to continue to grow at a high-single-digit rate, reflecting higher comps.