JPMorgan says these two retailers are its favorite picks into the holiday season

Published Mon, Nov 21 202210:24 AM ESTUpdated Mon, Nov 21 20222:56 PM EST

Costco and Target should emerge victorious as retailers navigate another tricky macro environment this holiday season, JPMorgan says. Analyst Christopher Horvers named both retail stocks the bank's favorites heading into the holidays in a note to clients Monday. Despite ongoing macro headwinds, he expects both Costco and Target to benefit from consumer trade-down in the months ahead. To be sure, both Costco and Target have reported weaker traffic in recent months, with Target last week warning of a soft holiday quarter as sales slowed in late October. Shares of Costco and Target are down about 8% and 31%, respectively, year to date. But inventory issues from earlier this year appear to be moderating at Target, and flattening grocery inflation could bode well for Costco going forward, Horvers said. "We see COST, TGT, and WMT's broad assortment as benefitting from a more frugal consumer that will consolidate shopping to fewer doors," he wrote. Retail earnings that kicked off last week showed some companies faring better than expected in an inflationary environment as supply chain issues moderate and companies work through the glut of inventory that's weighed on margins. While the season will pale in comparison to 2021, Horvers anticipates a solid holiday period based on historical standards. Along with Target and Costco, JPMorgan views names like Ulta Beauty and food-focused companies including Walmart and BJ's Wholesale as other holiday season winners. Auto parts dealers also make a solid defensive trade, Horvers wrote. "We continue to look to auto parts on the defensive side, where we remain optimistic for AZO , GPC , and ORLY given colder weather and more travel, especially compared to lower income exposed 'grocery' (i.e., BJ and WMT) where inflation is plateauing-to-slowing and consumers are under stress and trading down/out," he wrote. Among the biggest losers this season, JPMorgan sees headwinds ahead for names like Best Buy , Bed Bath & Beyond and Wayfair . — CNBC's Michael Bloom contributed reporting

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