The Christmas holiday shopping season will unofficially kick off this Friday. Granted, the National Retail Federation (NRF) forecasts only 3% to 4% growth in sales this season, which is lower than the pandemic-led gains retailers enjoyed. However, some retailers should still benefit, including the retailers on the Black Friday stocks list below. After all, consumers endure regardless.
“Consumers remain in the driver’s seat, and are resilient despite headwinds of inflation, higher gas prices, stringent credit conditions, and elevated interest rates,” as noted by NRF Chief Economist Jack Kleinhenz in a recent press release. With that in mind, what follows are seven Black Friday stocks you may want to buy ahead of a potentially big holiday boost.
American Eagle Outfitters (AEO)
American Eagle Outfitters (NYSE:AEO) is retail gold. Shares of the apparel company are up 40% this year and 61% over the past 12 months. Few clothing stocks have performed as well. The question is, can it continue? There seems no reason it shouldn’t.
Going into its fiscal third quarter report to be released ahead of Thanksgiving, American Eagle is flying high on the strength of its Aerie lingerie brand. Total sales rose to hit a record $1.2 billion last quarter with Aerie providing a 2% lift. The brand remains on track to become a $2 billion brand in just a few years. It recorded $1.5 billion in sales last year and should exceed that threshold this year.
Despite the phenomenal gains, American Eagle is still a bargain-basement stock. Shares go for less than 14 times next year’s earnings estimates, a fraction of its sales, and a paltry 9x the free cash flow () it produces. Wall Street forecasts the apparel stock will grow earnings at a 17.5% compounded annual rate over the next five years.
While its namesake brand remains hit or miss, Aerie has clearly taken flight. As it expands into new, thoughtful verticals expect American Eagle Outfitter’s outperformance to continue.
If there’s one company that will come into its own on Black Friday and throughout the Christmas season it’s Amazon (NASDAQ:AMZN). Although online shopping isn’t at the same level it was during the pandemic, it is on the rise. A Deloitte survey of consumers found 37% plan to spend their holiday budgets online, up from 35% last year. In-store spending is flat at 63%. Buy online, pickup in-store is falling. Only 28% expect to use this method, down from 35% last year.
That’s just as well for Amazon, which recently announced it was closing its two brick-and-mortar clothing stores. For all its prowess in online shopping, Amazon simply cannot translate that success into physical retail.
The e-commerce giant has a 38% share of all online sales. Last Christmas over 30% of all online consumers were purchasing half to three-quarters of their gifts at Amazon. There’s simply no other outlet that can compete against its dominance this time of year.
Amazon stock is relatively expensive (though it’s always been historically), but there is arguably no better stock to buy for a Black Friday boost.
Target (NYSE:TGT) is still a go-to destination for consumers, despite a 5% decline in sales in the third quarter. Shoppers shied away from big-ticket discretionary items such as electronics in favor of smaller, more frequently purchased goods, including beauty supplies. It was still good enough for the retailer to post earnings that beat Wall Street’s expectations.
Investors had a hint at what was coming after location data analytics firm Placer.ai noticed in September Target was experiencing a pullback in customer traffic during the off-season period between back-to-school sales and the start of the winter holiday season. It suggested “increasingly picky shoppers may be waiting for the best deals.”
That bodes well for Target for Black Friday and the weeks after. CEO Brian Cornell told analysts the retailer will be pricing two-thirds of its toys at $25 or less. He also noted Target’s store brand Good & Gather introduced over 100 new products, half of which will be priced under $5. That should resonate with consumers looking for deals but wanting to spend less.
Target’s stock jumped 20% on earnings, but remains 13% below where it started the year. Going for 16 times earnings, a fraction of its projected earnings growth rate and sales, and 16x, the retailer is an excellent Black Friday stock to buy today.
Investors had a similar preview for Walmart (NYSE:WMT) stock as well. Placer.ai noted the retail giant was experiencing a similar stall in foot traffic, but recently pointed out its Black Friday traffic holds up well. Last year it saw a stable number of visits only to see them explode the day before Christmas Eve when customer traffic surged 22% compared to the year before.
Walmart’s earnings report also indicated consumers were hesitant about spending too much on big-ticket items. Staples like food jumped up, helping boost sales 5% year over year, but discretionary goods like video games lagged. CFO John Rainey told The New York Times consumers are “leaning heavily into these promotional periods to buy these discretionary items that maybe they have held off purchasing this year.” Still, the retailer looks forward to Black Friday, even if it is cautious about the fourth quarter.
Walmart’s stock performed almost the exact opposite of Target. Where Walmart soared throughout most of the year (the stock is still up 10% year to date), it tumbled after the earnings report. Investors shouldn’t count out the discount retailer any time of the year, but especially heading into the biggest shopping period.
The value proposition of warehouse club leader Costco (NASDAQ:COST) is a key reason the stock will be a Black Friday winner. Consumers apparently love the deals they get as it is the only retailer amongst superstores and warehouse clubs to show increased foot traffic every quarter of 2023, according to Placer.ai data.
Because it relies upon high-volume, low-margin sales, the increased customer flow will benefit the bottom line. Albeit margins will be constrained as inflation takes a swipe at profits. But it’s a resilient retailer nonetheless because its clientele is more upscale than those shopping at Walmart. They have greater wherewithal to continue spending in the face of hardship.
Costco’s stock does trade at a premium to all other discount stores, but has outperformed most of them over the past decade. It offers reliable revenue growth and consistent profitability. Many also expect the retailer to raise membership prices next year, something it does every five years or so. That will be almost an automatic boost to profits when it occurs.
TJX Companies (TJX)
If consumers are feeling the pinch, then investors will want to keep a close eye on deep discounters like TJX Companies (NYSE:TJX). Its portfolio of brands including T.J. Maxx, Marshall’s, and HomeGoods offer consumers unrivaled savings on products for themselves and their homes. For example, where other retailers reported falling sales in the furnishings category HomeGoods saw sales spike 9% for the quarter. Overall, TJX sales were up 6% year over year. Chief Financial Officer John Klinger told analysts, “Our customers are telling us that their value perception of us remains very strong, which again, is key.”
TJX reported solid numbers, but the stock fell. That’s just an opportunity for savvy investors. The discount retailer raised guidance for profit margins, earnings per share, and comparable store sales.
On the surface, TJX stock doesn’t look cheap. It goes for around 22x free cash flow. Yet looking back over the past decade that’s a pretty low historical rate. It’s especially true when you realize just how well the stock has performed. It’s up 180% in the past 10 years versus a 150% increase in the S&P 500. If the market wants to offer up TJX as a Black Friday stock on sale, investors should accept the deal.
Five Below (FIVE)
Teens and tweens discounter Five Below (NASDAQ:FIVE) is another retailer that should be on your Christmas shopping list. While that description doesn’t do it justice anymore as its expanded product selection now makes it a destination for adults too, it’s why the discounter is a solid Black Friday buy.
Placer.ai noted Five Below offered up some of the most solid and consistent foot traffic data of any discount chain. Double-digit growth across the summer into the back-to-school season shows its low price points register with shoppers. The location analytics firm also found that Five Below customers were also frequently cross-shopping at Walmart and Target. It suggests Five Below is attracting consumers from a broad cross-section of incomes and explains why it was able to introduce higher price points into its stores.
The stock is only up 2% in 2023 despite strong earnings. It seems more caught up in investor concern of the general retail malaise. That indicates there is substantial upside present in its shares, an increase that should get a jolt from Black Friday sales.
On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.