THE HOLIDAY SEASON AND ITS IMPLICATIONS FOR GLOBAL GROWTH AND RETAIL STOCK INVESTORS

With the holiday season fast approaching, US consumers will look to open their wallets and spend their hard-earned cash on a wide array of products. On Black Friday alone, consumers are expected to spend more than $6 billion, taking advantage of very accommodative discounts. In the weeks to follow until Christmas, about 20% of annual retail sales will be tallied according to the National Retail Federation.

In 2018, Black Friday spending cruised to a record-high $6.2 billion, but traffic has begun to weaken in recent years and retail sales headed into the holiday season this year have slipped – creating concern that spending may not live up to the growth witnessed in previous seasons.

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Since consumer spending accounts for more than two-thirds of the US economy, a weak holiday season can cast doubt on the health of the sector and that of the broader economy. Investors have recently expressed fear over global growth concerns, and an underwhelming sales tally among US retailers would likely reignite those fears. That being said, there is data to suggest that while consumer’s tastes may have shifted, sales could prove encouraging nonetheless.

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Most notably, the rise of Cyber Monday has worked to erode Black Friday’s dominance as shoppers take to the internet to complete their purchases from the comfort of their own home. Evidenced by recent trends in consumer spending and this year’s holiday season spending forecasts from a variety of sources, online shopping has overtaken in-store shopping and will continue to outpace traditional sales. Therefore, while the optics on Black Friday look somewhat bleak, the broader holiday season could be on pace for another record-setting year, bolstered by Alibaba’s incredible Singles Day total of $38 billion.

Expected retail spending during Black Friday

According to the National Retail Federation, US consumers are likely to spend $1,048 per person this holiday season – the most on record. If the forecasts come to fruition, the United States will double down on China’s optimistic health and wellness checkup on the typical consumer, an encouraging sign for the global economy in these uncertain times. With the potential for a strong season, it becomes a question of which stocks have the most to gain.

TOP RETAIL STOCKS TO WATCH AHEAD OF BLACK FRIDAY

To be sure, the impact of the public’s transition to online shopping cannot be understated. Thus, Amazon (AMZN) could look to outperform its smaller brick and mortar counterparts like Nordstrom (JWN) and Gap (GPS). Accounting for roughly half of all US online sales, Amazon is in a unique position to profit from the shift in holiday spending preferences. AMZN has easily outpaced JWN and GPS in the year-to-date which has helped it to extend its outperformance of the broader retail sector over the last five years – a trend that could only accelerate given the growth predictions this season.

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Source: Bloomberg

Elsewhere, research from Adobe Analytics suggests that retail giants may have the upper hand compared to their smaller competitors:

“While online giants will see revenue increase by 65%, smaller retailers will only enjoy a 35% boost. Large retailers (annual online revenue of over $1 billion) will be the clear winners on Black Friday and Cyber Monday, with smaller retailers (less than $50 million annual online revenue) failing to drive strong online traction despite the growing awareness of Small Business Saturday. Additionally, large retailers will benefit from higher conversion rates, with customers visiting their sites 32% more likely to convert versus smaller retailers (23%).”

Evidently, retail leaders like Amazon, Target (TGT), and Walmart (WMT) look to maintain and even extend their lead this holiday season, which could see their share prices outperform the larger retail sector (XRT) in the days and weeks to come.

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Source: Bloomberg

A final consideration to be made is for retailers with a unique shopping experience that could draw more customers into the store. Lululemon (LULU) and Nike (NKE) are two such candidates while the former has created a unique shopping experience with yoga classes, food, and coffee in some of their stores, creating a more robust shopping experience.

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Source: Bloomberg

The unique advantage could see the two athletic apparel companies, particularly Lulu, extend their recent gains alongside the large retailers. Thus, seeking exposure in these retail stocks that find themselves with strong footing for the weeks ahead while looking to fade the broader sector would create a position in which the sector’s leaders are held while hedging against a broader stock market selloff.