An early holiday shopping forecast makes us glad we own two of the best retail stocks

Published Sun, Jun 18 202310:10 AM EDTUpdated Sun, Jun 18 20231:42 PM EDT

Americans are expected to spend less this holiday season and seek out discounts, according to a new CNBC survey of retail logistics managers. This desire to save money during a time when most people have to shop would favor TJX Companies ' (TJX) off-price brands and Costco 's (COST) bargain prices. According to the latest CNBC Supply Chain Survey , released Friday, 71% of the respondents indicated concern that the consumer will cut back on holiday spending in response to inflation. Meanwhile, roughly two-thirds of those surveyed by CNBC expect consumers to look for discounts. Together with an already cost-conscience consumer, the value shoppers can get at TJX-owned T.J. Maxx, Marshalls, and HomeGoods as well as Costco play right into our investment thesis on both stocks in these times of economic uncertainty due to the Federal Reserve's insistence that troublesome inflation has not yet been vanquished. The Fed on Wednesday paused its string of interest rate hikes but signaled two more were likely this year. Inflation currently remains high even as the trend in recent months has been smaller increases. Softer demand recently for discretionary purchases reflects consumers' worries about higher prices while they try to prioritize the essentials. For example, Home Depot (HD) expects overall sales and same-store sales to each decline between 2% and 5% in fiscal year 2023. It also forecasted a full-year diluted earnings-per-share (EPS) decline between 7% and 13% as do-it-yourself buyers pull back on home improvement projects. Home Depot, which last month reported its biggest quarterly revenue miss in about 20 years, stuck with its prior full-year guidance at its Investor Day this past week Similarly, Club holding Foot Locker (FL) has also seen a deceleration in consumer spending and elevated inventory levels, leading it to report lower guidance for the rest of the year. Management updated its sales guidance for fiscal 2023 to down 6.5% to down 8% from its prior guidance of down 3.5% to down 5.5% as "consumers are forced to be more choiceful on how they spend their money," CEO Mary Dillon said during the company's post-earnings call last month. To be sure, consumers spent more than expected in May as government retail sales results from earlier this week rose 0.3% for the month. That's higher than the 0.1% estimate. Tuesday's consumer price index showed a 4% year-over-year increase in May, down from April's 4.9% and a huge decline from the Covid pandemic peak of 9.1% in June 2022. Even though cooling inflation appeared to have lifted some weight off Americans' backs last month, retailers are still preparing for a cautious shopper ahead. To accommodate the pressured consumer, Wall Street believes having the right inventory will differentiate successful retailers from the rest of the pack. COST YTD mountain Costco YTD performance Cowen named Costco a best idea for 2023, citing steady traffic trends, record renewal rates and solid membership fee income. Importantly, analysts also highlight Costco's prudent inventory management as a "catalyst for solid execution ahead," in a recent research note. The wholesale retailer, analysts explain, plans to increase the assortment of food products to balance slower discretionary sales. The firm said "gross margin tailwinds" are ahead for Costco as supply chain costs come down. These "additional gross profit dollars could be invested in stronger price gaps and could yield [higher] mid-to-single digits traffic upside." We think the possibility of a membership fee increase and special dividend sometime in the future would be a nice cherry on top and keeps us as long-term owners of the stock. When asked about membership pricing on last month's post-earnings call, CFO Richard Galanti once again gave no indication that a fee hike was imminent, though he acknowledged that it would happen "at some point." TJX YTD mountain TJX Companies YTD performance In a separate research note, JPMorgan said TJX is best positioned to capture consumer trade-down demand. The off-price retailer's 46-year track record of offering value "resonates with consumers across a number of economic environments," analysts said. They also like TJX's "consistent execution" in both inflationary and recessionary periods, "given TJX's 1,200 buyers sourcing good/better/best merchandise appealing to broad-based income and age demographics." For its fiscal year ending Feb. 3, 2024, TJX expects overall comparable store sales to be up 2% to 3%. Management said it does not see demand deterioration since it offers best-in-class value and a treasure hunt experience consumers love. Notably, the company sees a clearer path to improve profitability to pre-pandemic margins. Bottom line In a tough retail environment where consumers are expected to spend less and hunt for discounts, we're sticking with retailers that offer quality merchandise at value prices, and that's consistently been TJX and Costco. "We have the two best retailers for the moment," Jim Cramer said during the Investing Club's June Monthly Meeting Wednesday. "TJX because there is so much excess inventory in the system and TJX can pick and choose from department stores galore and Costco because it offers the cheapest merchandise," he explained. We're encouraged that TJX has been a value-add to consumers pressured in an inflationary environment and that it has solid execution in a slower economy. This gives us more confidence that the outlook for the off-price retailer is looking positive toward the second half of the year and the best way to play the current retail environment. We continue to view Costco as a best-in-class operator and remain big fans of the club membership model, its value proposition, and high customer loyalty. During inflationary periods, Costco can keep prices down and attract new members. We recently sold COST shares to secure some profit. That sale took place Wednesday after Costco shares' solid 9% run following its latest earnings report in May. (Jim Cramer's Charitable Trust is long TJX, COST. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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Shoppers come and go the TJ Maxx store at the Mall at Prince George's on August 17, 2022 in Hyattsville, Maryland.

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