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An investor's guide to 2021 US holiday sales

Dave Sekera, CFA  |  29 Nov 2021Text size  Decrease  Increase  |  
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Editor’s note: This is part two of a two-part series. In the part one, we reviewed our outlook for 2021 holiday sales and how low inventory levels have persuaded shoppers to start even earlier this year.

Between low inventory supply and high consumer demand, retailers are well-positioned to capitalise on holiday sales this year.

We previously shared our forecast for strong holiday sales in 2021. We project that total retail sales for fourth-quarter 2021 will increase by 9.5% compared with last year.

Breaking the total retail sales number down, we forecast that sales in the physical bricks-and-mortar stores that are leveraged to the holidays (this excludes areas such as gasoline, motor vehicles, groceries, and so on) will rise 9.1% this year, and e-commerce sales will increase by 10.4%.

In addition, we are seeing consumers returning to in-person shopping as foot traffic has recently surpassed to pre-pandemic levels.

Not only will 2021 be a banner year for top-line retail sales results, but we expect that many firms will also post exceptionally strong operating margins. With inventories low and consumers more concerned with finding what they are looking for than obtaining the lowest price, we expect that promotional activity and discounting will be much lower this year than in the past.

Yet, with the broad stock market already trading well above a composite of our fair values, finding undervalued stocks is especially difficult, particularly as many of those leveraged to retail sales have already run up earlier this year. We caution investors to recognise that many of the factors that will lead to a strong holiday season will normalise over the course of 2022 and many of the same structural issues that faced the retail sector prior to the pandemic will resurface.

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Stocks for which we see the best upside potential include retailers that have used the pandemic to accelerate their transition into an omnichannel model. These retailers are able to offer consumers a service-oriented experience both in-store as well as online and to balance their inventory between store locations and shipping warehouses. Additionally, we see upside potential in areas where economic dislocations from the pandemic have yet to fully normalise and the market continues to discount those stocks.


Though many retailers were already beginning to focus on how to improve their online sales channels and evolve their businesses into an omnichannel format, the pandemic accelerated this evolution. Online sales skyrocketed by 32% last year compared with 2019, and we forecast that e-commerce sales will increase by another 10.4% this year.

This holiday season, we expect that the investments those retailers made in their online channels will begin to pay off.

For the fourth quarter, we project that Amazon.com’s (AMZN) average e-commerce sales growth across its first-party and third-party sales will average a little over 6% compared with last year. But e-commerce is not just an Amazon story anymore: We expect that other retailers’ e-commerce platforms will experience even faster year-over-year growth as a result of their online expansion.

Yet, while Amazon’s e-commerce sales growth may lag the broader sector, the stock remains one of our best ideas. Our long-term investment case centers not only on Amazon's dominance in e-commerce, but its public cloud business through Amazon Web Services, as well as its quiet strength in its unique advertising business.

Finding undervalued stocks in an overvalued market is especially difficult, and 5-star rated stocks are few and far between. In the e-commerce channel, we see significant value for long-term investors in Groupon (GRPN). We are confident that the firm’s consumer app and merchant self-service dashboard enhancements, along with the continuing macroeconomic recovery, will stabilise the firm’s active customer count and drive further growth in revenue in 2022 and beyond.

Conversely, on the overvalued side, although PayPal's (PYPL) growth in the third quarter remained fairly strong on an absolute basis, we maintained our fair value estimate for this narrow-moat firm, which places its rating in the 2-star category. Going forward, we think PayPal’s trajectory might not be completely smooth and that the current market price reflects more of a best-case scenario from a long-term perspective.


Electronic gaming

All three of the electronic gaming companies have already released the latest installments in their gaming franchises, as well as some consistently popular remastered games. As the games can be downloaded, they are not beholden to the same inventory constraints as other companies.

In fact, supply chain issues and semiconductor shortages could work out in favor of the gaming companies. Consumers that are unable to locate a new in-stock gaming console, or other intended gifts, may ultimately use that money to purchase games for their existing gaming system.

Activision Blizzard (ATVI) has been under pressure from negative headlines, but we think that a strong holiday sales season in its Call of Duty franchise could reinvigorate investor sentiment in this 4-star stock.

As for the other two competitors in this space, we note that 3-star Take-Two Interactive (TTWO) is trading at a 15% discount to our fair value, placing it near the lower end of that range, whereas Electronic Arts (EA) is trading closer to our fair value.

Electronic Gaming


Both Hasbro (HAS) and Mattel (MAT) reportedly spotted the supply chain issues early on and have been able to source enough product to position their inventory well for a strong holiday season. Plus, the two companies may benefit from the return to in-person extended family holiday celebrations as relatives may choose to give gifts in person as opposed to sending gift cards or cash.

Between the two toy companies, we see better upside potential for 4-star Mattel than for 3-star Hasbro. Mattel has been successful in stabilising its portfolio of toy brands and has turned around the performance of several historically underperforming brands. In addition, Mattel is driving better operating margins through newly instituted efficiency programs. We think the firm is shaping up to put itself back in a position where it can reinstate its dividend, which will broaden the stock’s appeal to investors with a dividend requirement.



Though back-to-school sales may be over, we expect that this holiday season may experience an increase in back-to-work sales. Like foot traffic returning to the malls, foot traffic has been steadily recovering back to the office. And after working from home in pajamas and athleisure wear for the past 21 months, many employees will be looking to refresh their business attire. We think that 3-star rated Gap (GPS)--which owns the Banana Republic and Old Navy brands in addition to its namesake brand and is trading at a slight discount to our fair value--could be a beneficiary of this trend. In addition, Gap’s Athleta brand is an attractive part of its business given the growth of the women’s athleisure category.

Revenue and operating margins among department stores will likely look impressive this year, as low inventory levels will limit the amount of promotional spending and discounting and a higher percentage of goods will be sold at full price. However, across our coverage, we think the market has already priced in the anticipated strong results, and in some cases the stock prices have run up too far.

In our view, the long-term secular shifts in the retail sector have not changed, and after the shipping and transportation issues resolve next year, revenue growth and margins will revert toward historical norms. For example, we rate Macy’s (M) with 1-star and TJX (TJX) with 2-stars as we think their stock is trading well above fair value. In our view, the strong results we will see for the fourth quarter will not be indicative of these firms’ long-term earnings power.

With its focus on luxury and higher-end brands, 4-star Nordstrom (JWN) is well-positioned this holiday season to capture higher-end sales. We recently increased our fair value on Nordstrom to $41 as we believe it is recovering from the pandemic crisis and its Closer to You strategy is beginning to take shape. Announced in early 2021, this plan emphasises e-commerce, growth in key cities, and a broader off-price offering. In addition, Nordstrom has been repositioning its product assortment and whittling down its more formal business attire to be replaced with better-selling casual and athleisure wear.

Among the supercenters, 3-star Walmart (WMT) is trading the closest to our fair value compared with 2-star Costco (COST) and 1-star Target (TGT). Of the three, we think Walmart will be in the best position over the long run to compete with Amazon in the e-commerce channel. In addition, if inflation proves to be more persistent than we currently expect, it also is in the best position to capture customers that need to trade down to lower-priced brands and goods.


Specialty retailers

Although none of the specialty retailers we cover are trading at enough of a discount to warrant a 4-star rating, we do see several 3-star stocks that are trading below our fair value. For example, we think that chains such as Bed Bath & Beyond (BBBY) and Bath & Body Works (BBWI) will benefit from consumers returning to in-person shopping.

In the electronics space, Best Buy (BBY) may not see the same demand it did last year for office products, but we think the company is one of the better examples of a retailer successfully transforming its business from brick & mortar to a true omnichannel retailer. In fact, we recently raised our Morningstar Economic Moat Rating for Best Buy to narrow from none. The upgrade is based on the changes Best Buy has implemented to provide a differentiated customer service model, strong upstream relationships, and process improvements. Best Buy’s stock is trading at the high end of our 3-star range, but we think it looks well-positioned to capitalise on consumer demand this holiday season. Best Buy has been marketing early this holiday season and advertising electronics in a way that plays to consumers’ fear of missing out.

While we see some value in the specialty retail sector, it also contains some of the most overvalued stocks under our coverage. For example, 1-star Dick’s Sporting Goods (DKS) has been a beneficiary of the pandemic as sales of exercise equipment, outdoor, and sporting goods surged. We think Dick’s will continue to perform well in the short term. The company appears well-positioned in categories such as apparel and footwear this holiday season. However, we think investors have over extrapolated the strong results of the past two years too far into the future and that earnings growth will slow as sporting goods sales return to a normalised rate.

The athleisure category had already been surging before the pandemic, but it took another leg higher as remote workers changed out of their business casual clothes and into more comfortable clothing. While Lululemon (LULU) may be the industry standard for athleisure wear, the growth of this category has attracted ever more competition across stores and additional channels. At 2.5 times our fair value, Lululemon stock is one of the most overvalued across our U.S. coverage.

While consumers were stuck at home for the past two years, many have spent time redecorating--leading luxury retailer RH (RH), which specialises in furniture and home furnishings, to flourish. Like the other overvalued specialty retailers, we think the market is overestimating future earnings growth. We don’t think we are being overly pessimistic in our forecasts as we project top-line retail sales growth will average 11% per year over the next 10 years and operating margins to expand to 25%, a 300-basis-point increase from 2020. Yet, even after incorporating those strong growth prospects, the stock is still trading at 1.7 times over our fair value.

Specialty retail

Luxury retail

With the stock market at all-time highs and travel spending still muted, we expect that luxury sales will have another especially robust holiday season. Demand for handbags and some apparel has been very high coming out of the pandemic, especially among the affordable luxury brands.

Yet, within this category, 3-star Tapestry (TPR) is the only stock that we think is fairly valued, with the remaining stocks trading at 2-star levels. Tapestry has worked to improve margins, boost e-commerce, and engage with consumers. In its most recent quarter, both Coach and Kate Spade beat our sales and margin expectations and Tapestry lifted its full-year guidance to earnings per share.

We anticipate a strong holiday season for Capri (CPRI) as the resumption of international travel could bolster its outlet and luxury merchandise. However, we caution investors to look past the short-term results as we think the market is overestimating how long this short-term growth will last.


Power sports and RVs

Though the pandemic may be receding, enthusiasm remains elevated for outdoor activities. We think that the combination of the stock market hitting new all-time highs, hourly earnings increasing, and a high savings rate have set the stage for another strong holiday season for power sports and RVs.

We expect that retail demand will remain especially robust for both Malibu Boats (MBUU) and Polaris Industries (PII), both of which we rate with 4-stars. In fact, we are hearing that sales have been so fervent that retailers’ backlogs are building well into 2022. As such, we expect there will be limited promotional spending and discounting this year, which bodes well for their operating margins.

Power sports and RVs

Beverages - alcoholic

Historically, alcoholic beverages have not been affected enough to be included in the holiday sales category. However, based on the significant undervaluation in this sector combined with our expectations for a pickup in on-premise consumption and in-person holiday celebrations, this sector should not be overlooked this year.

The pandemic instigated a sharp drop-off in both in-person celebrations and on-premise consumption last year. Although at-home and on-premise holiday parties may not fully return to their pre-pandemic levels, as new COVID-19 cases remain on a downward trajectory, we do expect to see an uptick in in-person holiday events from last year. This should lead to an increase in on-premise consumption, which is a higher-margin business. Additionally, we find that consumers are more brand-conscious about the beverages they provide at holiday events and are often willing to trade up to higher-margin brands.

The increase in consumption may not necessarily be enough to meaningfully boost fourth-quarter earnings, but we think the stocks could see a lift as valuation metrics are low across most of the sector and the uptick could help improve investor sentiment. Between Anheuser-Busch InBev (BUD) and Boston Beer (SAM), this sector contains two of the only 13 stocks that we currently rate with 5-stars across the over 700 U.S. companies we cover.

Beverage- Alocholic

REITs – shopping malls

Finally, we think the death of the mall has been greatly exaggerated. Shoppers continue to still value the in-person shopping experience, and malls continue to evolve, both to refine the portfolio of stores located within the malls themselves, as well as to redevelop their footprints to include more experiential offerings. Experiential offerings are those that cannot be recreated online, such as restaurants, gyms, physicians’ offices, and other services. These experiential offerings are not only a way to compete against online sales, but a way to change the mall into a lifestyle center and drive foot traffic.

Between the two mall-based REITs we cover, we see better value for investors in 4-star Macerich (MAC). In our view, Macerich has successfully repositioned itself over the past decade as a true owner and operator of Class A regional malls. Although many retailers may look to reduce their store count over the next decade and transition to an omnichannel business model, the high foot traffic and sales productivity of Class A malls in Macerich's portfolio continue to make them attractive places for retailers to place stores.

Real Estate

is chief U.S. market strategist for Morningstar.

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