The holiday-shopping season has kicked off in earnest but the initial impression is underwhelming. Consumers are feeling the pinch, and that means investors should be picky about their retail stocks, according to analysts.
While online spending might be coming in strong, that might be coming at the expense of in-store sales growth which looks set to be more moderate.
“We continue to look for modest holiday sales growth this year, with our expectations in the low-single-digit range. This would be the smallest increase since 2016,” D.A. Davidson analyst Michael Baker wrote in a research report.
That means fiercer competition between retailers as well as keeping an eye on which brands are forced to discount heavily. It could be particularly tough on apparel companies. Analysts at Jefferies favor off-price retailer
TJX
(ticker: TJX) and clothing chain
Abercrombie & Fitch
(ANF) as stocks that can handle the pressure.
“As consumers continue to witness headwinds from the resumption of student-loan repayments, the lower-income consumer is becoming incrementally pressured and looking to maximize savings,” wrote Jefferies analyst Randal Konik in a research note.
That could be a plus for TJX’s focus on value, with the company also being a Barron’s stock pick earlier this year. Jefferies has a target price of $110 on TJX and a Buy rating. The stock was down 0.5% at $89.50 in premarket trading on Monday.
Choosing Abercrombie & Fitch is to go the other way, and opt for a brand whose customers can shrug off the pain being felt by lower-income consumers. Konik noted the company has benefited from being able to make full-price sales, and its holiday discounts this year were 25% off everything for its core brand, compared with 30% off the previous year.
Jefferies has a Buy rating and $85 target price on Abercrombie & Fitch stock. Shares were down 1.1% at $72.51 in premarket trading.
Write to Adam Clark at [email protected]
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