5 Retail Stocks Jolly With Holiday Cheer

NEW YORK ( TheStreet) -- This holiday season consumers are looking for electronics, value-added deals and anything they can purchase online or through their mobile devices.

According to the National Retail Federation, holiday retail sales will rise 3.9% over 2012 to $602.1 billion, fueled by consumers' demand for larger ticket items as well as the growing online shopping experience. However, fiscal concerns as well as any lasting effects of the government shutdown could temper holiday spending, the trade association said.

A few weeks ago Morgan Stanley analysts predicted that the 2013 holiday season would be the worst season for retailers since 2008, the height of the recession.

"Debt dynamics, gains in wealth, and lower gas prices have lifted consumer buying power ahead of the 2013 holiday shopping season, but Congressional discord and balance sheet priorities cloud the outlook. While the ability to spend more is apparent, willingness remains the key question," Morgan Stanley analysts wrote in a retail industry research note on Oct. 31.

As retailers struggle to get shoppers in the door, the Morgan Stanley note predicted that margins would erode this season given the high promotional environment by retailers.

"We expect specialty retail fourth quarter gross margins to decline 66 bps year over year , on average," the note said. "We predict J.C. Penney will offer extremely deep discounts early in the season to ensure it achieves its positive comp guidance, putting pressure on other retailers to do the same. Also, with six fewer shopping days between Thanksgiving and Christmas, retailers could push the promotional 'panic button' earlier than needed, putting margins at risk."

Last week's BDO USA survey forecast that the consumer electronics category will likely be the top-performing category once again this holiday season as well as the most discounted. The survey findings are from the most recent BDO Retail Compass Survey of CMOs, which polled 100 chief marketing officers at leading U.S. retailers in September and October.

Another bright spot are gift cards, which continue to be "a very popular option for busy shoppers and discerning family and friends on holiday shopping lists," the survey found. Gift card sales are expected to rise 6.9%, according to BDO.

The stocks on this list have some very common themes: With the new gaming consoles hitting the shelves later this week, more than a few companies are expected to benefit from added sales. Online commerce continues to perform above and beyond as well as the trend for strong bargain hunting by wallet-conscious consumers.

TheStreet presents its top retail stocks this holiday season.

1. TJX

Consumers may not be shopping at the mall this holiday season, particularly for apparel, but they are shopping at off-price retailers like T.J. Maxx and home decor stores like HomeGoods.

TJX, the parent company to those two brands as well as Marshall's, is positioned well. It is Citigroup analyst Oliver Chen's top defensive stock pick for the holidays.

"At TJX, we believe stronger holiday marketing efforts, consistent store traffic and sales growth, and increasing penetration into younger demographics following a shifting trend to mix and match fashion offer significant upside to fourth quarter comp guidance of 2-3%," Chen wrote in an Oct. 24 research note.

Chen upped his 12-month price target by $5 to $68 on TJX based on the company's increased holiday marketing on social media and television along with the brand's "value message" gaining traction with both younger customers while staying relevant with its core base, he wrote.

Additionally the company's "superior merchant team and inventory management" that drives "newness, flexibility and margins" as well as the minimal inclusion of comp sales and e-commerce in the company's top-line guidance offers incremental upside, he said.

Shares of TJX are up 46% this year. The stock closed down 0.08% on Monday at $61.67.

Last month, TJX boosted third-quarter and full-year guidance fueled by strong sales and profit margins.

The retailer also raised comparable-store sales growth to approximately 4% in the quarter, up from the 2% to 3% growth it forecast in August. TJX reported comparable sales of 7% in the third quarter of 2012.

2. ULTA

Ulta Salon Cosmetics & Fragrance ( ULTA) is a second stock on Citigroup's Chen's list of stocks with holiday season upside.

"ULTA has strong growth potential given 15%-20% long-term square foot growth, a new CEO focused on driving customer awareness, increasing e-commerce from 2-3% of sales" close to the industry average of 8% or more, Chen's Oct. 24 note said.

He estimated that the company's margin could expand from 12.5% now to 15%- 16% over time. The company also has opportunity to capitalize on brand awareness, Chen wrote.

"We expect average dollar sale (ADS) to benefit from salon, prestige, and skincare mix, and also e-commerce, although traffic may be a little volatile but we expect headwinds to be offset by strong ADS and conversion," the note said. "ULTA's off-mall concept is likely better positioned than mall retailers which are seeing -1% traffic trends."

Additionally, the product concept still enjoys benefits from being the new guy on the block plus the company's new e-commerce launch that grew 72% in the second quarter as well as a fast growing loyalty club, which "will continue to draw the holiday crowds and to support a premium valuation," he said.

Ulta shares are up 30% this year. The stock closed on Monday up 0.3% to $128.07

3. RetailMeNot

Continuing with the bargain-hunting theme, consumers are increasingly searching the Web for retailer coupons. RetailMeNot ( SALE) of Austin, Texas, is a third-party provider of digital coupons in a relatively nascent market.

The global company owns a portfolio of coupon and deal-related Web sites in the U.S., Canada, Germany, France and the Netherlands, enabling consumers across to find hundreds of thousands of digital coupons and offers from retailers and brands, according to a company description.

The stock is up 11% since the company listed shares on the Nasdaq in July. Shares rose 2.2% to $31.52 on Monday.

"We continue to believe it is one of the best positioned in the large, under-penetrated digital couponing space and that there is meaningful upside from current stock price levels," according to Jefferies analyst Brian Pitz. He reiterated his buy rating on the stock in an Nov. 6 research note, following the company's third-quarter earnings. Pitz has a 12-month target price of $40.

The holiday season brings plenty of opportunity for RetailMeNot. For one, the success of its growing mobile app could provide momentum to RetailMeNot in selling its mobile coupon platform to more bricks-and-mortar retailers next year.

"As the leading digital coupon platform, RetailMeNot is well positioned to benefit from a more promotional retail environment combined with a more cautious consumer," Morgan Stanley analysts wrore in an Oct. 31 note. "Additionally, the company is rolling out a mobile app through which retailers can run campaigns to drive in-store purchasing. While, RetailMeNot is early in this effort, the mobile app has been downloaded approximately 7 million times so far, and the company is heavily marketing this effort."

A prime area for opportunity is clearly in mobile net revenue. RetailMeNot's mobile revenue jumped 190% to $5.8 million in the third quarter.

Last week, the company reported quarterly earnings of $5.6 million, or a per-share loss of 6 cents, down from earnings of $6.6 million, or 1 cent share, in the year-earlier quarter. The loss in the latest quarter included a $7.5 million payout in preferred stock dividends as well as increasing costs associated with promoting its coupons.

But the $1.6 billion-market cap company's net revenue jumped 39% over the prior year to $47.4 million, the company said. Excluding the company's acquisitions, net revenue still jumped 35%, it said. At quarter's end, RetailMeNot had more than 13.9 million global subscribers to a newsletter or store alert, up 81% year over year.

In his note, Pitz cited the company's second consensus estimate beat and raised guidance since its IPO. Management expects revenue between $66 million and $69 million for the fourth quarter. The company also raised its full-year revenue guidance to $197 million to $200 million, and adjusted income between $76 million and $78 million.

"We continue to believe in our global team's ability to execute on improving our websites and mobile capabilities, setting the stage for the continued importance of our business as an efficient, highly effective marketing channel that facilitates increased sales for retailers and brands gearing up for the upcoming holidays," said Cotter Cunningham, founder, president and CEO of RetailMeNot.

4. GameStop

The highly-anticipated releases of Microsoft's ( MSFT) XBOX One and Sony PlayStation 4 this month is good news for GameStop ( GME).

GameStop shares are up more than 126% this year. The stock closed down 0.18% to $55.38 on Monday.

However, SunTrust Robinson Humphrey analyst David Magee said there is potential for the stock to rise even further based on "the coming cycle" of new gaming consoles, according to an Oct. 28 note. Magee raised his price target on the stock by $5 to $70 in the note. He rates the company at "buy."

"We believe that GME's viability has clearly been enhanced by the mostly physical composition of the coming cycle," the note said.

"The U.S. console market has contracted some 40% in size in recent years, but could rebound 20% in 2014, a tailwind that we don't believe is fully reflected in Street expectations" of GameStop earnings. Magee estimated same-store sales growth of approximately 8% for the company in 2014.

"Interestingly, while some investors think the stock has made its big move, we think there is more upside, noting that the stock is still relatively cheap and that peak multiples weren't achieved until a few months after" past console launches, Magee wrote.

While GameStop is surely to benefit from the strong customer interest in the new gaming consoles, Magee is also optimistic about the company's other initiatives to diversify itself and set up for long-term growth.

"By virtue of its growing used business, forays into digital and mobile, and its opportunities with broader electronics re-commerce and Simply Mac stores" (one of the few authorized Apple resellers), GameStop won't be "nearly as exposed to the software cycle as is commonly believed," the SunTrust note said.

"Right now, the Simply Mac chain only has approximately 16 stores in a few western states, but we believe GME plans to use its real estate experience to help that chain grow aggressively in markets too small for Apple stores," the note added. "We don't think it is a stretch to see this mostly hardware business growing to $500 million-$1 billion business someday."

GameStop reports third-quarter earnings on Nov. 21. Analysts, according to Thomson Reuters, expect the company to post earnings of 56 cents a share, up 49% from the year-earlier quarter.

5. Amazon

Wall Street loves to point to Amazon ( AMZN) as one of the best positioned stocks for the holiday season, given consumers' love of e-commerce and of electronics which tends to accelerate in the fourth quarter as shoppers flock to get their holiday deals.

"With the shorter holiday period this year, and continued news of weakening consumer confidence, we expect time-strapped and value-conscious consumers to look online to stretch their dollars further and for convenience," Morgan Stanley analyst Kimberly Greenberger wrote in an Oct. 31 note. "Additionally the increased focus on omni-channel retailing as more consumers turn to their smartphones should accelerate e-commerce growth," which should outpace store sales growth by a wide margin in the fourth quarter, Greenberger wrote.

Amazon shares are up 41% this year. The stock closed up 1.1% to $354.38 on Monday.

Of course, Amazon will be another company to benefit from the refresh of the PlayStation and Xbox video game consoles, boosting "a key holiday category which has been lackluster for several years," the note said.

Amazon launched on Nov. 1 its Black Friday Deals Store and Electronics Holiday Gift Guide for shoppers.

Amazon is gearing up for the seasonal business uptick by hiring 40% more seasonal employees this year vs. last year. It also announced on Monday that it plans to partner with the U.S. Postal Service for Sunday shipping starting in New York and Los Angeles and then adding Dallas, Houston, New Orleans and Phoenix next year.

The company said last month it expects fourth-quarter net sales to be between $23.5 billion and $26.5 billion, up between 10% and 25% from the fourth quarter of 2012. And while it does not publicly disclose members of its Amazon Prime service, it did say that "millions of new Prime members" signed up last quarter.

Additionally, during last year's holiday season, Amazon's third-party marketplace sellers grew units sold by 40%. "This year, Amazon.com will feature promotions from third-party resellers on its Holiday Deal pages for the first time, which should increase the relevance of the Amazon.com platform during the holidays," the Morgan Stanley analysts note.

Written by Laurie Kulikowski in New York.
Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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