Although the base case for the Federal Reserve no longer calls for a recession, that hasn’t stopped Wall Street talking heads from proclaiming that the still-absent recession is just around the corner.
Sure, there are technical signs that have pointed to recession in the past, like the inverted yield curve. But inflation has come down significantly from its highs and wage growth has provided a measure of unexpected resiliency to the U.S. consumer, despite everything that the last few years have thrown at them.
And despite consumer confidence numbers that have remained below pre-pandemic levels for the last few years, spenders have shown a willingness to loosen their purse strings for travel, experiences, and, yes, even personal spending.
While it’s too early to say how this year’s Black Friday played out for retailers, the fact remains that the tail end of the calendar year is typically strong for stocks, and the aforementioned resiliency could offer a nice spending bump for retail stocks.
So far this year, the SPDR S&P Retail ETF (XRT), the best proxy for the retail sector, is up a very modest 5.5%, versus an 18% 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 year-end 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, so we’re looking for signs of momentum now.
3 Retailers to Play a Black Friday Bump
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 that has continued through November.
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.
With ROST shares already hitting new 52-week highs, it has plenty of momentum heading into the end of the year. 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.
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 10% this year but is trading about 8% 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 15 times forward earnings – and with a 3.1% 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 holiday shopping cart. But all of them are doing just fine, whether or not the holiday season brings a year-end bump.
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.
