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In the U.S., Morningstar forecasts 'modified' retail sales – which are goods subject to holiday sales both online and in-store – to rise by 3.2 per cent in the fourth quarter from the same period last year. That compares to a 14.1-per-cent year-over-year surge in sales in the fourth quarter of 2021.KENA BETANCUR/Getty Images

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The holiday shopping season is a make-or-break period for retailers looking to capture a share of consumers’ wallets. For investors, it’s a time to check out companies poised to outperform their peers and help boost portfolio returns.

It could be a challenging holiday season for retailers this year with consumers expected to curtail spending as rising inflation and interest rates make the cost of goods and debt more expensive. Concerns about a recession and the growing number of layoffs in the headlines also have households minding their budgets.

A recent Deloitte Canada report predicts holiday spending in Canada will drop by 17 per cent to $1,520 per household this year compared to last year.

In the U.S., Morningstar Inc. forecasts “modified” retail sales – which are goods subject to holiday sales both online and in-store – to rise by 3.2 per cent in the fourth quarter (Q4) from the same period last year. That compares to a 14.1-per-cent year-over-year surge in sales in Q4 2021, when interest rates were still at historical lows and consumers were loosening their wallets following the easing of pandemic restrictions.

While retailers will struggle to earn profits this holiday season, there could be opportunities for investors to buy companies at cheaper market valuations, says Dave Sekera, Morningstar’s chief U.S. market strategist in Chicago.

Mr. Sekera believes the market has become “overly pessimistic” about retailers in the short term, and many companies have long-term value.

“Even though this holiday season may not look great, [it could be an opportunity] for long-term investors who are willing to look through some of the margin compression this year and think about what it would look like in the future when things start to normalize,” Mr. Sekera says.

“Many of these stocks are at levels that we think are just too low at this point.”

An example he cites is e-commerce giant Amazon.com Inc. AMZN-Q, which is down by about 45 per cent year-to-date. He notes the company has other divisions, such as Amazon Web Services, and an advertising arm, which he believes make the stock more valuable in the long-term despite near-term headwinds including inflation and macroeconomic issues.

Another stock he believes has long-term potential is Gap Inc. GPS-N. Although it’s down by more than 20 per cent this year, Mr. Sekera says sales appear to be stabilizing and management has laid out plans to address some of its issues.

“It’s not necessarily that we’re thinking Gap will have a great holiday season, but we think that the value of the stock came down too far based on what we believe the long-term value of the company is,” he says.

He believes Gap’s best opportunities are in its Old Navy brand, which has new leadership, and Athleta Inc., which is expected to benefit from the same women’s athleisure trend that has propelled Vancouver-based retailer Lululemon Athletica Inc. LULU-Q.

‘Leaders in their retail segments’

Jay Smith, portfolio manager and investment advisor at CIBC Wood Gundy in Toronto, also sees opportunities in the retail sector, driven in part by savings consumers racked up during the pandemic. Many retailers have also largely solved inventory issues that left them short of products during last year’s holiday season.

Still, as in many sectors, Mr. Smith believes some retailers stand out more than others as long-term investments. His favourites include Amazon, Walmart Inc. WMT-N and Costco Wholesale Corp. COST-Q. In Canada, he likes convenience store giant Alimentation Couche-Tard Inc. ATD-T and grocery chains such as Empire Co. Ltd. EMP-A-T

He says all of these companies, which he holds in clients’ portfolios, are well-run and leaders in their retail segments.

“[Regardless of] whether we’re in a recession, these retail stocks will do extremely well,” says Mr. Smith, pointing to low unemployment rates and substantial savings that are propping up consumer demand.

Mr. Smith doesn’t own clothing retailers like Gap and Lululemon, believing fashion retail is too fickle.

“I follow trends on stocks, but when it comes to fashion … it’s not something I’m interested in exploring,” he says.

‘Stock picker’s game’

Michael Currie, investment advisor with The Currie Group at TD Wealth Private Investment Advice in Toronto, believes the holiday season isn’t an ideal time to buy retail stocks because of the extra focus on sales numbers, which can make these companies more volatile.

“For that reason alone, I would generally be telling people to stay away from them – just for this time period – not forever,” he says.

Mr. Currie notes performance of retail stocks can also vary greatly. As such, he points to three major Canadian retailers – Dollarama Inc. DOL-T, which is up by 30 per cent this year; Canadian Tire Corp. CTC-A-T, down by 17 per cent; and Aritizia Inc. ATZ-T, which has fallen by 3 per cent.

“It’s a massive difference,” Mr. Currie says, pointing out that discount retailer Dollarama is likely less volatile in an economic downturn because it’s considered a consumer staples company.

Many companies, like Amazon and Apple Inc. AAPL-Q, are also considered retail and technology stocks, making them more or less choppy depending on broader industry trends.

“In retail, it’s really a case of it being a stock picker’s game,” Mr. Currie says.

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