Bank of America Says These 8 Retail Stocks Are 2021 Holiday Must-Buys

  • Bank of America analysts expect holiday retail sales will grow by 4.9% this holiday season.
  • Heightened demand, increased socialization, and earlier holiday marketing will bring strong sales.
  • They picked their 8 top stocks to buy now before the holiday shopping season begins.

Family, food, and presents are all great, but there’s another reason for investors to celebrate this upcoming holiday season: retailers will see strong sales once again.

In a November 3 note, a team of research analysts at Bank of America led by Managing Director Lorraine Hutchinson projected that retailers will enjoy a 4.9% increase in holiday sales-weighted average comparable store sales. 

The team noted that last year, sales in certain retail categories like home furnishings and home improvement grew as Americans spruced up their living spaces to add in home offices and gyms. Yet despite being selective with their spending, consumers helped retailers gain an impressive 11.2% increase in comparable store sales in 2020, well above the 3% increase in 2019.

The team wrote that this year they “expect strong comps in most categories as shoppers are more comfortable to do in-person shopping.”

According to aggregated data from Bank of America credit and debit cards, retail spending — excluding automobiles — is 20% higher than 2019 levels. They expect this trend to continue in the near-medium term. In addition, data shows that retail spending has increased across all levels of income.

weekly retail sales

Bank of America

monthly credit and debit card spending

Bank of America

“A declining savings rate and increasing revolving credit could also suggest increasing consumer willingness to spend and borrow going into this holiday season,” they noted.

With vaccines more prevalent and social scenes reviving, the team also predicted that consumers would do more gift-buying and personal shopping, such as purchasing formalwear for holiday events. Brick and mortar spending has risen since August, “suggesting pent-up demand for B&M clothing and department store spend.”

“We anticipate a continued mix shift back towards apparel and away from home categories, which was a top-performer during the height of the pandemic,” Hutchinson wrote, with a caveat that they “don’t expect demand for home items to diminish in a significant way.”

Besides increased in-person shopping, data from Q2 2021 shows that e-commerce remains strong. Hutchinson expects digital sales to stay above their pre-pandemic levels going forward.

She also notes that holiday shopping will likely be pulled forward earlier this year compared to previous years.

“Holiday marketing is earlier than ever this year,” Hutchinson said, noting that several retailers like Target, Amazon, Macy’s, and Nordstrom have begun holiday shopping campaigns weeks, or even months, in advance. “Retailers are encouraging shoppers to buy early or risk seeing items sold out or receiving packages post-holidays.”

Supply chain risks are likely to continue

Of course, the

retail sector

has been burdened recently with supply chain issues that are unlikely to be solved anytime soon.

Freight costs have skyrocketed, in some instances up 200%, due to soaring consumer demand. Port congestion has caused shipping delays, sometimes for weeks, as massive backlogs of goods have built up. COVID lockdowns in Vietnam have led to factories shutting down production.

Retailers have moved some deliveries from ocean to air, which is faster but much more expensive, and the Biden administration has made efforts to alleviate congestion issues. Still, Hutchinson and her team expect supply chain problems to worsen in coming weeks, “leading to higher costs and the potential for missed deliveries.”

Supply chain issues have also spurred on inflation, including wage inflation, as “the churn in the labor force and the disengagement of some workers has translated into rapid wage growth.”

“Elevated CPI as well as higher gas prices could limit overall volumes this holiday season as purchasing power decreases,” Hutchinson wrote.

The analysts noted, however, that supply chain disruptions may actually prove to be positives for off-price retailers.

“It’s likely that full-price retailers will cancel or not accept late order deliveries given the seasonality and changing trends of products,” they wrote. Off-price retailers can then obtain these items at steep discounts.

Promotional sales have also been low in the retail industry due to heightened demand, product scarcity, and increased shipping and labor costs, leading to more items being sold marked up or at full-price. According to Hutchinson, this proves advantageous for off-price retailers because they can “move retail prices higher and still maintain [their] value proposition of offering goods at significant discounts to other retailers.”

Hutchinson and her team identified their top 8 stocks in the retail sector for this upcoming holiday season. They are listed below with each company’s ticker, market capitalization, and price objective, along with analyst commentary and potential downside risks.