The U.S. economy has been far more resilient than many thought. Certainly more than the economists who almost unanimously were calling for a recession this time a year ago; more than the Federal Reserve anticipated as they hiked interest rates from near zero to 5.5% in just 18 months; even more than the average American, what with consumer confidence far lower now than in 2021 or in the three years that preceded the pandemic.
And yet, U.S. GDP just reached a two-year high (4.9% growth) in the third quarter, and retail sales have been solid, if unspectacular. They improved 0.7% in September, and were revised upward to 0.8% growth in August – again, not exactly jaw-dropping growth, but the two best-performing months since January. Plus, inflation has fallen below 4%, or less than half of what it was (~8%) this time last year.
Against that backdrop comes the start of another holiday shopping season, as Black Friday is a mere two weeks away. November and December are historically the two best months on the calendar for the stock market, and retail stocks typically get a nice bump from all the spending. With no recession in sight, and with prices not accelerating the way they were a year ago, this year should be no exception.
So far in 2023, however, retail stocks have underwhelmed. The SPDR S&P Retail ETF (XRT), the best proxy for the retail sector, is up a very modest 1.6% this year, versus a 14% gain in the S&P 500. But the XRT tends to perform better as shopping season picks up. From 2010-2019, i.e., the decade before Covid threw a wrench into holiday shopping plans, XRT averaged gains of 2.2% in the three months that followed Black Friday, and therefore included most retailers’ first-quarter earnings reports the ensuing January or February. But that trailed the 3.2% average return in the S&P 500 over that same span. So, there’s no edge in buying a whole bunch of retail stocks in the hopes of a Black Friday bump.
That said, certain retail stocks do get a market-beating bump every year. The problem is, it’s not the same one every year. Amazon (AMZN), for example, was up 29% in the three months that followed Black Friday in 2017. The next year, it was down 1.2% over the same period.
Macy’s (M), which is synonymous with Thanksgiving and Black Friday sales, was up 25.6% in 2014-15, but down 28.3% in 2015-16.
Conversely, Walmart (WMT) was down 4.1% in 2014-15 but up 11.5% in 2015-16.
You get the point. There’s no real consistency from year to year as to which retail stocks get the Black Friday bump. What is consistent is that the retail stocks that are catapulted after Black Friday were already advancing heading into Thanksgiving.
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3 Retail Stocks for Black Friday
Retail Stock #1: American Eagle Outfitters, Inc. (AEO)
American Eagle has managed to maintain growth while boosting profit margins as consumers gravitate toward higher-end apparel offerings. The company offers on-trend clothing, accessories and personal care products under the American Eagle (specializing in denimwear) and Aerie (lingerie and activewear) brands through nearly 900 store locations worldwide. The firm’s latest quarterly report in early September had more than a few encouraging nuggets. Although total Q2 revenue of $1.2 billion was essentially flat from a year ago, it improved 11% from the prior quarter and set an all-time high for the second quarter, with store revenue rising 4%.
American Eagle said it’s seeing “positive momentum” and an ongoing sequential revenue improvement trend supported by several new marketing campaigns and on-trend collections that are “resonating well” with customers. By segment, Aerie sales of $380 million increased 2% while American Eagle sales of $767 million were up 1%. But the main reason for the strength isn’t an out-and-out growth story but a return to normalcy when it comes to earnings, thanks to cost controls, inventory management and a normalization of supply chain shenanigans from the past few years—despite so-so revenue tallies, per-share earnings of 25 cents in Q2 improved an eye-opening 21 cents from a year ago while beating estimates by 60%. The company touted its continued focus on maintaining inventory discipline, posting a 7% total inventory decline with units down 11%, and management said the profit improvement focus is expected to yield even more positive results over the next 12 to 24 months. Looking ahead, expect modest sales improvement and, while 2024 earnings estimates are mundane, many are likely looking for more bottom-line beats, which makes the already-modest valuation even more appealing.
As for the stock, AEO topped out in June 2021 and slid almost continuously until last October, surrendering about 75% along the way. There was a solid rally after that, but shares petered out in February and ended up retesting the low near 10 in May. Since then, though, it’s been all good—AEO shot back to slightly higher highs in September, and perhaps more encouragingly, its dip that month led to a strong bounce to higher highs despite the market.
Retail Stock #2: Ross Stores (ROST)
Dollar store stocks and discount department stores were once a Cabot favorite – particularly of my colleague, growth investing expert Mike Cintolo. But the pandemic crushed them, with sales all but evaporating in 2020 and much of 2021. Now, they’re “back” – or at least back enough to grab Wall Street’s attention as dirt-cheap value plays and turnaround stock candidates. And that’s what’s happening with Ross Stores, a discount department store that operates under the name Ross Dress for Less.
Ross’ sales hit a record high near $19 billion in 2021, a 50% recovery from the mere $12.5 billion it managed in 2020. Sales dipped very slightly in 2022 (to $18.7 billion), but are on track for a rebound this year, with analysts estimating 7% growth to just over $20 billion, with 19% EPS growth. Those numbers are expected to rise another 4.8% and 9.5%, respectively, next year.
The company will report third-quarter earnings on November 16.
The stock hasn’t been a world beater, but it is up 5.8% year to date and more than 30% in the last year after a major gap up from 81 to 119 last November – fueled in part by a 23% third-quarter (2022) earnings beat. With ROST shares already hitting new 52-week highs, it has plenty of momentum headed into this year’s Q3 report. The valuation is a tad on the high side with a forward P/E of 23, but it’s worth a flyer given the growth forecast.
Retail Stock #3: Restaurant Brands (QSR)
Fast food restaurants were more resilient than most retailers through the pandemic. Now they’re thriving like it’s 2019. Restaurant Brands International, which owns popular fast food and coffee shop chains Burger King, Popeyes, Tim Hortons and Firehouse Subs, has been even better than that. Sales only dipped 11% in 2020; they’ve been up every year since, immediately rebounding to a new record ($5.73 billion) in 2021, improving another 13.4% (to $6.5 billion) in 2022, and are likely to top $7 billion this year. Meanwhile, earnings per share are set to grow by just over 3%.
As for QSR stock, it’s up a mere 5% this year, but is trading about 13% below its mid-summer highs above 77. And like ROST, it gapped up in a major way last November, from 57 to 68. Trading at less than 14 times forward earnings – and with a 3.3% dividend yield to boot – there’s plenty of upside here, especially as we enter the holiday season.
Bottom Line
I believe in trends and charts, and all three of the aforementioned retail stocks look very good.
Add one or all of them to your Black Friday shopping cart. But all of them are doing just fine even without the year’s biggest shopping weekend.
If you want to learn what other momentum stocks we’re recommending as the holidays approach, you can get yourself the gift of a subscription to Cabot Stock of the Week. In it, you’ll find strong momentum stocks to buy now.
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*This post is periodically updated to reflect market conditions.
