Don’t look now, but the fourth quarter is here, and that means summer is over, temperatures are dropping, the leaves are starting to fall, football is in full swing and, yes, the holiday season is right around the corner. While Halloween is still a month away, some retailers are already out with Christmas trees and decorations, and many on Wall Street are predicting a banner selling season for the top retailers.
With the economy in solid shape, personal earnings growth and more job openings than unemployed people, many pundits on Wall Street are predicting that a super-strong consumer could help produce one of the best holiday selling and shopping seasons in decades.
With that in mind, we screened the Merrill Lynch research universe for stocks rated Buy that could benefit from the consumer strength and found five that could be big winners in the fourth quarter.
Amazon
This is the absolute leader in online retail, and many feel that online holiday shopping will continue to grow massively. Amazon.com Inc. (NASDAQ: AMZN | AMZN Price Prediction) serves consumers through retail websites that primarily include merchandise and content purchased for resale from vendors and those offered by third-party sellers.
The company serves developers and enterprises through Amazon Web Services, which provides computing, storage, database, analytics, applications and deployment services that enable virtually various businesses. AWS is also the undisputed leader in the cloud now, and many top analysts see the company expanding and moving up the enterprise information value chain and targeting a larger total addressable market.
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Consistent with data from 2018, digital marketing users overwhelmingly cited Amazon as the fastest-growing channel for advertising budgets. Many retailers also are leveraging their Amazon advertising data to retarget users on other channels (namely Facebook) to drive traffic and sales to their own websites (bypassing Amazon marketplace or FBA fees).
The Merrill price target is a whopping $2,350, and the Wall Street consensus target is $2,305.41, The stock closed trading on Monday at $1,735.91.
Costco
This has become the ultimate destination for the American consumer regardless of the economy. Costco Wholesale Corp. (NASDAQ: COST) has a unique business model. It operates membership warehouses and it buys the majority of its merchandise directly from manufacturers, essentially cutting out the middleman. Costco sells in bulk but also at a lower price, thus fueling its rapid growth. With consumers having more free cash to spend with gasoline prices still low, this major retailer may continue to see large revenue gains.
Costco remains one of the few conventional retailers where metrics like store traffic, market share gains and a validated model could bode well for international growth and expansion. The company is largely unharmed by e-commerce, and it continues to add stores in strategically mapped out locations.
Wall Street loves the company’s pricing authority on key items and the leading merchandising offerings, and the relatively new Costco co-branded card with Visa is a real positive. Add in the company’s growing online presence and the future looks bright.
Costco shareholders receive a 0.90% dividend. Merrill has a $310 price target, while the consensus price objective is $292. The shares closed at $288.11 on Monday.
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Kohl’s
This top retailer got hit hard in May and still offers an excellent entry point now. Kohl’s Corp. (NYSE: KSS) operates department stores in the United States that offer private label, exclusive and national brand apparel, footwear, accessories, beauty and home products to children, men and women customers. The company also sells its products online at Kohls.com and through mobile devices.
While retail chains have suffered from internet pressure, Kohl’s has held its own as consumers see it as a solid discount retailer. In addition, Amazon is growing its partnership with the department store chain. Last summer, they announced that Kohl’s would begin selling Amazon devices, such as the Echo and Fire tablets, at selected stores.
Kohl’s and Amazon announced earlier this summer that all Kohl’s stores would accept free, convenient returns for Amazon customers starting in July. Kohl’s and Amazon first worked together in 2017 to pilot the returns program, which is currently operating in 100 stores in the Los Angeles, Chicago and Milwaukee markets. Kohl’s and Amazon aim to roll out the program to all the more than 1,150 Kohl’s locations across 48 states.
Kohl’s will accept eligible Amazon items, without a box or label, and return them for customers for free, providing additional service and convenience to Amazon customers. This could drive huge traffic for the retailer during the holiday season.
Investors receive a 5.4% dividend. The $60 Merrill price target compares with the $55.71 consensus target and the most recent close at $49.66.
Target
This remains a solid and safe retail total return play, and it is on the Merrill Lynch US 1 List. Target Corp. (NYSE: TGT) is one of the largest discount retailers in the United States, operating roughly 1,800 Target stores across the country. The company sells merchandise in its Signature Categories Style, Baby, Kids and Wellness, as well as other products in both physical Target stores and online at Target.com.
Over the past couple of years, Target has poured tons of money into its e-commerce offerings, overhauling its stores and refreshing its inventory to compete better against Amazon. Target has even embraced the same-day delivery concept and is expanding retail floor space for toys as it looks to scoop market share after the closing of Toys “R” Us.
Solid numbers and a very positive analysts day had the Merrill analysts noting that they believe the company’s ability to moderate fulfillment costs through its “stores as hubs” model should drive margin improvement in fiscal 2020. They also feel the valuation is compelling at current levels, and it could be a big winner this holiday selling season.
Target pays its shareholders a 2.5% dividend. Merrill Lynch has set its price objective at $125. The consensus target is just $110.88, and shares closed Monday at $106.91.
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Walmart
The giant retailer has rallied nicely off levels posted in August but still has upside. Walmart Inc. (NYSE: WMT) is the world’s largest retailer, operating retail stores under the formats of Walmart Stores, Supercenters, Neighborhood Markets, as well as Sam’s Club locations, in the United States, and it has a growing e-commerce business (including Jet.com). Internationally, Walmart also operates locations in several countries, including Argentina, Brazil, Canada, China, Japan, Mexico and the United Kingdom.
Each week, nearly 260 million customers and members visit the company’s 11,535 stores under 72 banners in 28 countries and e-commerce sites in 11 countries. With fiscal year 2019 revenue of $515 billion, Walmart employs about 2.2 million associates worldwide.
The company announced last summer its plans to acquire a 77% stake in India’s e-commerce retailer Flipkart in a $16 billion debt and cash transaction. The deal dramatically expands Walmart’s presence in India, where online retail is growing quickly and Flipkart is a leader. In fact, it recently posted record first-day sales on opening day of the annual festive season sales in India that kicked off last weekend.
Shareholders receive a 1.80% dividend. The Merrill Lynch price target is $135. The consensus target is $119.57, and shares closed at $118.68.
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These five top companies may be poised for record holiday spending to come their way. While the scenarios for the consumer could change between now and the end of the year, the fact of the matter is that many people have already started their holiday shopping, and that will only increase as we get closer to December.
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