Wall Street is making a list and checking it twice as shoppers go on their annual sprees this weekend.
Walmart (WMT) and Costco (COST) are positioned to end the year strong as consumers focus on necessities like groceries.
“Walmart has this combination … [of] food and grocery” at low prices, TD Cowen analyst Oliver Chen told Yahoo Finance over the phone. “Plus they have all the discretionary [products] you can get.”
That combination is key to “winning in retail,” Chen said. Similarly, Costco benefits from a robust grocery operation and a steady apparel business, Chen noted. Shares of both big box stores hit all-time highs this week.
Retailers like Abercrombie and Fitch (ANF), Crocs (CROX), and Dick’s Sporting Goods (DKS) are also projected to do well, while department stores like Macy’s (M) and Kohl’s (KSS), alongside brands such as Under Armour (UA) and American Eagle (AEO), will likely be on the downslide.
Scale is a big advantage for Walmart and Costco, especially with another round of tariffs on the horizon. Their size also gives them a leg up on collecting data and developing artificial intelligence tools, Chen said.
The holiday season is “off to a good start in line with our expectations,” Walmart CFO John David Rainey told Yahoo Finance. Walmart expects sales to grow 3% to 4% in the fourth quarter.
Specialty retailers are also making their way to Wall Street’s top picks.
Abercrombie has done an “extremely good job in the last two years” using social media to promote products with micro-influencers, CFRA analyst Zach Warring told Yahoo Finance.
“That marketing strategy is really working,” Warring said. “Abercrombie will continue to do well over the holiday season.”
Abercrombie and Fitch CEO Fran Horowitz told Yahoo Finance’s Brian Sozzi that the holiday season has started “strong.”
Same-store sales grew 16% in the third quarter, marking the sixth straight quarter of double-digit percentage growth.
Crocs is another company that spends “most of their marketing dollars on digital marketing and newer marketing,” Warring said.
While shares of the company are up only 14% year to date, they have been impacted by the $2.5 billion acquisition of HEYDUDE, which put pressure on the top line.
“They paid a lot of money for Heydude,” Warring noted. “Outside of the first six months after the acquisition, you start to see pretty big declines in top-line revenue there.”
In the third quarter, Crocs’ revenue grew 7.4% to $858 million, while Heydude’s revenue dropped 17.4% to $204 million.
On the flip side, Wall Street remains careful about department stores.
“We’ve been more cautious on department stores,” Chen said. “It’s been a tougher category.”
Macy’s stock has dropped 19% this year to around $16 per share, compared to the $24.80 per share offered in a buyout it rejected in July. Same-store sales dropped 1.3% in Macy’s preliminary third quarter results. Net sales fell 2.4% to $4.74 billion.
Kohl’s stock has declined 46%. Net sales fell 8.8% to $3.5 billion in its quarterly results, while same-store sales dropped 9.3%, dragged down by softness in apparel and footwear.
Meanwhile, specialty retailers Under Armour and American Eagle are two names that Warring is down on heading into the holidays.
“In terms of valuation, Under Armor is extremely high,” he said. It trades at a forward price-earnings ratio of 36.50, compared to a P/E ratio of 22 for the S&P 500.
It also has “long-term management issues,” Warring said. Kevin Plank reclaimed the CEO role in March, replacing Stephanie Linnartz, who occupied the role for only a year.
In its latest results, Under Armour’s revenue fell 11% year over year to $1.4 billion.
As for American Eagle, “they do a lot of discounting, and I think their margins take a hit because of that,” Warring said.
In the second quarter, the company saw its gross margin rate grow 90 basis points to 38.6%.
Shares for the company are down 12% year to date as the company is set to report its third quarter earnings results on Dec. 4. after market close
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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.
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