Black Friday was better than feared for retail stocks — Two potential big winners

Published Mon, Nov 28 202212:44 PM ESTUpdated Mon, Nov 28 20221:28 PM EST

Black Friday was better than expected for retailers this year, with discount names Walmart and Costco poised to be among the season's winners, according to Bank of America. Online sales were up 2.3% year over year for the day after Thanksgiving, reaching a record $9.12 billion , according to Adobe. Foot traffic at brick-and-mortar stores, however, was still below 2019 levels, Bank of America analyst Justin Post said in a note Sunday. It was up 2.9% from 2021, data from Sensormatic Solutions shows. The National Retail Federation has said it expects sales during November and December to rise between 6% and 8% from last year. "We would characterize early Black Friday data as slightly positive for the sector, and we continue to expect 4Q to be a little more back-end loaded than last year due to prior year inventory issues," Post said. Inflation is putting a strain on consumers' wallets this year, which has them hunting for bargains . That puts discount retailers well-positioned to gain share, especially Walmart , Costco and BJ's Wholesale Club , Bank of America analyst Robert Ohmes wrote in a separate note Monday. Walmart launched its Black Friday deals four days early for online shoppers and offered its Walmart+ members early access to its Black Friday events, which included two earlier dates in November, he said. The big-box retailer made significant price investments to offer deeper discounts, and traffic appeared very strong in stores, Ohmes noted. "Overall, stores appeared very well-staffed & well-stocked (though in certain stores we observed lighter inventory for items like TVs, toys & bikes that may have been selling out)," he wrote. He has a $165 price target on the stock, which implies 7.8% upside from Friday's close. Customer traffic was also solid in warehouse clubs Costco and BJ's; however, Costco's was stronger, Ohmes said. "COST showcased TVs, electronics, and other displays (including various home appliances) at the front of the club, and we noticed the highest traffic levels in the apparel, electronics, and grocery departments," he said. "At BJ's we saw the strongest traffic in the grocery/household consumables." Ohmes has a price target of $605 on Costco, implying 13% upside from Friday's close. Among his reasons for the valuation are Costco's "healthy customer traffic growth and strong membership renewal rates, which should continue given our expectation for a further rise in the perceived value of shopping at warehouse clubs and COST's leading warehouse club position from a merchandising, store execution, and private label standpoint." Telsey Advisory Group also called discounters the likely winners on Black Friday weekend as consumers continue to favor one-stop shopping for essentials and value-focused discretionary items. "Furthermore, superior digital functionalities, including faster fulfillment via Drive Up, higher levels of inventory, and elevated markdowns and promotions across discretionary categories attracted consumers," analyst Dana Telsey wrote in a note Monday. Overall, shoppers were most focused on toys, beauty, accessories and footwear, according to Deutsche Bank. "Specialty retailers appeared to be relative winners while we observed decent trends across the discounters and department stores," said analyst Krisztina Katai. Outperformers include Walmart, Bath & Body Works , Ulta Beauty , VF Corp 's The North Face, Gap 's Old Navy, American Eagle Outfitters and Lululemon , she wrote in a note Monday. Morgan Stanley also called out strong traffic results for Lululemon and American Eagle, as well as Abercrombie & Fitch and Victoria's Secret. "These strong traffic results were achieved despite 1) similar or lower y/y discounting levels, & /or 2) discounting activity below total sector averages. In our view, this means these retailers' assortments likely resonated with consumers & allowed these banners to drive relatively more profitable Black Friday revenue," analyst Alex Straton wrote in a note Monday. Meanwhile, Target , which earlier warned of weak holiday sales , is favored by Piper Sandler, which recently upgraded the stock to overweight from neutral. "We have become tactically more constructive on stocks where we see a gross margin recovery opportunity in 2023," said analyst Edward Yruma. "Our recent upgrade of Target ... was predicated on the framework that 2022E's ~400 bps in gross margin compression provides a material recovery opportunity in 2023, even if revenue trends see pressure from a deteriorating consumer," he wrote in a note Monday. — CNBC's Michael Bloom contributed reporting.