The Challenging Outlook for Retail Stocks

The holiday-shopping season is in full swing, but it doesn't seem as exciting as previous years. Consumers are feeling the financial pressure, which means investors need to be selective when it comes to their retail stock investments, as suggested by analysts.

Online Spending vs In-Store Sales Growth

While online spending continues to thrive, in-store sales growth appears to be more moderate. D.A. Davidson analyst Michael Baker predicts only modest holiday sales growth this year, with expectations in the low-single-digit range. If this were the case, it would mark the smallest increase since 2016.

Fierce Competition and Heavy Discounting

With the likelihood of modest sales growth, retailers will face a more competitive environment. It will become essential to monitor which brands are forced to heavily discount their products. This scenario may particularly impact apparel companies. Jefferies analysts recommend TJX (ticker: TJX), an off-price retailer, and Abercrombie & Fitch (ANF), a clothing chain, as stocks that can handle this pressure.

Jefferies analyst Randal Konik notes that lower-income consumers, who are facing headwinds due to student-loan repayments, are looking for ways to maximize their savings. This could work in favor of TJX's focus on value. Jefferies has set a target price of $110 for TJX and maintains a Buy rating. As of Monday's premarket trading, the stock was down 0.5% at $89.50.

Abercrombie & Fitch: Meeting the Demands of Resilient Customers

On the other hand, choosing Abercrombie & Fitch means opting for a brand whose customers can withstand the financial strains faced by lower-income consumers. Konik highlights that the company has benefited from making full-price sales. In addition, Abercrombie & Fitch's holiday discounts this year offer a 25% off everything for its core brand, compared with 30% off the previous year.

Jefferies maintains a Buy rating and a target price of $85 for Abercrombie & Fitch stock. As of premarket trading, shares were down 1.1% at $72.51.

Adam Clark contributed to this report