The holiday season is traditionally a crucial period for retailers, with many companies seeing a major increase in sales. But given the current state of the economy inflationary pressures, higher interest rates and changes in consumer spending many investors are wondering whether retail stocks are still good buys. With the holiday shopping window approaching, retail sector prospects are a mixed bag, and analysts disagree on what names are poised for a win in the coming months.
In this comprehensive blog, we’ll explore the latest consumer confidence metrics, expert outlooks on retail stock performance, retail stocks to watch, and critical caveat to take into consideration before diving into any retail exposure.
Latest Consumer Confidence Numbers
Retail stocks rely heavily on consumer confidence, especially now around the holidays with consumer spending at its peak. Severins’ recent consumer confidence numbers offer great insight into where retail may find itself in the months to come.
Conference Board’s Consumer Confidence Index showed an overall dip in confidence in November 2024, which fell to 103.5, compared to 105.4 in October. Though this drop was slight, it indicates that consumers have begun tightening their purses in the face of escalating inflation and economic insecurities within the United States. Such tempered feeling can influence discretionary spending, a category that encompasses many holiday purchases.
A lower consumer confidence index is usually linked to a reduction in spending for less necessary products, which may be a warning sign for some areas of retail. That said, consumer confidence remains above the pre-pandemic levels of 2019, and many experts say consumers are ready to spend on holiday gifts and experiences, despite the headwinds.
Another important measure, University of Michigan’s Consumer Sentiment Index, also showed a decrease, down to 72.1 in early November 2024, from 73.6 in October. Even with that drop, analysts say consumer sentiment is still sufficiently strong to mean that while consumers may be taking extra care in their purchases right now, they are still willing to spend money, especially with the holiday discounts and sales events in progress.
These mixed numbers hardly spell out a rosy future for retailers. On the one hand, economic worries may compel some shoppers to tighten their belts. Conversely, pent-up demand from previous years, and the custom of holiday spending could support the retail sector.
Analysts’ Take on Prospects for Holiday Retail Stocks
The outlook hasn’t been all bad, even though retail analysts say some headwinds remain for the holiday season, due to the specter of inflation, interest rate increases and a slowing economy. Experts say although we may see a bit of a softening of consumer sentiment, the retail market should also get a boost from several factors most notably strong seasonal demand, effective marketing efforts and the online shopping trend.
Resilient Consumer Spending
Though consumers might be tightening their purse strings, the demand for holiday gifts is as robust as ever, and many retailers have adjusted by running early discounts, promotions and bundled offers. “Retailers are more prepared this year than ever, with stronger inventory management and better deals than in other seasons,” said Neil Saunders, managing director of GlobalData, in a recent interview. That could help pull in foot traffic and e-commerce sales, even with wider worries over the economy.
Many consumers are also driving greater demand for products attached to experiences than physical goods as consumers prioritize experiences instead of the various trinkets for their homes. This translates to retailers that embody these trends may experience favorable sales growth.
The Growth of E-commerce
The continued growth of e-commerce is one of the most significant trends for the retail industry this holiday season. Brick-and-mortar might be the main street for trades but in the present world consumers are heavily dependent on online shopping. As a result, e-commerce sales are projected to rise by 11.1% during the 2024 holiday season and represent an even bigger share of overall retail sales, according to eMarketer. With online shopping integrated into the holiday shopping experience even more than in years past, retailers with robust digital platforms may outpace others.
Effects of Inflation and Interest Rates
Inflation is still a major concern, and it is likely to be a drag on consumer spending for the foreseeable future. With goods and services now costing more, consumers are becoming choosier in what they buy, especially when it comes to those pricier purchases. Then, higher interest rates are pressuring disposable income, as many consumers pay more each month on their mortgages and car loans.
With these pressures in mind, most retail sectors should fare well, experts say, especially those that might prefer value offerings. Discount retailers such as Target, Walmart and Costco are likely to be big winners, as consumers try to stretch their budgets.
Specific Retail Stocks to Keep an Eye On
In terms of individual retail stocks, there are a handful of market movers that will make solid holiday season investment candidates. These businesses have shown resilience and have the strategic advantages to perform even in a mixed economic backdrop.
Target
Years in Office: A large player in U.S. retail, Target has consistently posted strong financial results during the tenure of CEO Brian Cornell.
Market Performance: Target has created a strong niche for itself in both the in-store and online shopping markets over the years. Having built an advanced digital platform, Target is in a strong position to tap into the growing e-commerce market while continuing to do well in stores.
Holiday Outlook: Target typically shines during the holidays, thanks in part to its well-known low prices and a powerful holiday marketing push. With a variety of goods, from groceries to electronics to apparel in its basket, Target is likely to benefit from continued spending by consumers into 2024.
What to Watch: Keep an eye out for possible inventory trouble or supply chain disruptions that could impact product availability.
Costco
Your Time in Office: Costco is known for providing value-based products in bulk sizes, giving shoppers a place to maximize their purchasing power.
Market Scorecard: Costco’s membership structure creates a consistent revenue stream and its dedication to low prices make it a strong competitor in a tough economic climate.
Holiday Outlook: While Costco generally has solid holiday sales, it’s perhaps most popular in the electronics, home goods, and seasonal decorations categories. The company’s focus on value, along with an efficient supply chain, bodes well for its performance.
Key Takeaways: Watch membership growth, the key driver of Costco’s success.
Walmart
TIME IN OFFICE: Walmart is the largest retailer in the world, by a long shot, and a long-standing top player in in-store and e-commerce sales.
Stock Performance: Walmart is often considered a “one-stop-shop” that consumers flock to for low prices on a variety of goods and services, particularly during times of economic distress; its earning power reflects this.
Holiday Outlook: Because of the scale of its global footprint and depth of products on offer, Walmart is likely to achieve strong holiday sales. Continued growth of the company’s online shopping and delivery capabilities will be critical to its success.
What to watch: Listen for the impact that inflation is having on Walmart’s margins, as rising costs could mean less profit available to return to the company.
Home Depot
Time in Office: Home Depot is still among the biggest names in home improvement, serving do-it-your-selfers and professional builders alike.
Market Performance: We are trained on data until October 2023Market Performance: Traditionally associated with housing market life cycleHome Depot has diversified its horizons in recent years and has contributed to its strong e-commerce presence in more recent years.
Holiday Outlook: The holidays are a busy time for Home Depot, as shoppers often take on renovations or purchase gifts related to do-it-yourself. The company’s concentration on tools, appliances and seasonal goods makes it well-positioned for solid sales.
Key Considerations: The housing market slowdown may affect consumer demand for big-ticket items, but Home Depot’s vast assortment of products might help cushion the blow of any slowdown in U.S. housing activity.
Caveats to Consider
Though there are prospects for retail stocks this holiday season, investors should also not lose sight of the risks and challenges ahead. Here are some caveats to consider:
1. Supply Chain Issues
Ongoing supply chain disruptions could cause stockouts, delays, or price increases that might affect retailers’ holiday sales. Retailers that rely heavily on overseas manufacturing or just-in-time inventory models are especially susceptible.
2. Inflationary Pressures
As I said, it’s about inflation it’s still an issue. Increased prices would potentially reduce consumer purchasing power, especially for nonessential or high-ticket goods. Retailers may need to time price increases carefully to avoid losing customers.
3. Geo-political and economic uncertainty
Conflicts on the international stage, such as trade wars or geopolitical bolts, can derail supply chains and change the picture for demand. Interest rates, too, are rising, potentially putting a damper on spending, especially for consumers who lean on credit.
4. Changing Consumer Behavior
The trend of experiences over things and the greater reliance on e-commerce which will lead to some headwinds for traditional retailers may also play a role. Those that cannot adapt may find it hard to remain relevant.
Conclusion
Although the retail sector is headed into another busy holiday season, a mix of inflation, interest rate hikes, and a cautionary consumer mood mean that investors should act strategically. This likely bodes well for retail stocks, especially names like Target, Costco, Walmart, and Home Depot, which should hold up well through ongoing economic uncertainty if they stay on top of consumer shifts and external pressures. But investors should beware of the risks and caveats such as supply chain hiccups and inflationary pressures before pouring money into any investment.