Bank of America says be wary of a soft holiday shopping season, gives its top picks - CNBC

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Holiday spending will be sluggish as consumers grapple with inflation, but Bank of America thinks a handful of value retailers and specialty stores could see a boost. Bank of America projects holiday sales-weighted average same-store sales will rise 0.6% year over year for its retail universe. That's compared to 3.3% growth in 2022 and a 6.2% increase in 2021. "A stubbornly tough macro environment driven by inflation has pressured consumer spending throughout the year, particularly in discretionary categories," analyst Lorraine Hutchinson wrote in a Tuesday note. "Consumers are readjusting spending habits to reflect these dynamics and we expect more considered purchase decisions will continue." There has been deflation in core goods such as apparel and household furnishings, but prices overall still remain higher compared to previous years, according to Hutchinson. Ongoing inflation in energy, notably gasoline and electricity, as well as in grocery has left consumers with less income from discretionary purchases, the analyst noted. Inflation accelerated in September, but personal spending came out surprisingly stronger than expected, rising 0.7%, according to the core personal consumption expenditures price index . Here are the buy-rated retailers that could stand out amid broader retail softness, according to Bank of America. Bath & Body Works is the bank's top pick in specialty retail, as the firm expects margin expansion and new product launches to stabilize the company's sales. Shares of the mall retailer, which is known for its scented soaps and lotions, are down nearly 30% for the year. "We think the recent pullback in BBWI shares represents a particularly compelling opportunity… the business has multiple drivers in place to rebuild margins in 2H and return to sales growth in F24," Hutchinson wrote in an Oct. 27 note. The firm has a buy rating on the company and a $50 price target, which implies shares could soar more than 71% from Tuesday's close. Another favorite retail name for Bank of America is luxury apparel seller Ralph Lauren . Shares have gained 6.5% in 2023, but have shed about 3% this quarter amid a slowdown in U.S. sales, driven by more cautious consumer spending. "We believe Ralph Lauren is well positioned to outperform peers heading into the holidays," Hutchinson wrote in the Oct. 31 note, adding that the company's North American sales should show "gradual improvement." "We see continued opportunities for gross margin expansion and don't think this is fully appreciated by the market," she said. The firm, which has a buy rating on the stock, has a price target of $145 on shares. This indicates about 29% upside for Ralph Lauren from Tuesday's close. Walmart and Target are the bank's top discount retail picks heading into the holiday season, particularly as consumers continue to seek out more value and off-price goods this season compared to previous years. Hutchinson is bullish on Walmart for its "strong value proposition," which she thinks should support traffic and share gains, and she likes Target for its lean inventory and focus on delivering value. Sporting goods chain Academy Sports and Outdoors was also highlighted as a Bank of America favorite. To be sure, Hutchinson noted that although retail is witnessing lower demand this year, retailers will push more promotions around key holidays such as Black Friday, Cyber Monday and the week of Christmas in order to drive traffic and sales. "Consumers are looking for deals and will choose retailers offering the best value," Hutchinson said. - CNBC's Michael Bloom contributed reporting.

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Bank of America says be wary of a soft holiday shopping season, gives its top picks - CNBC
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Bank of America says be wary of a soft holiday shopping season, gives its top picks - CNBC

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