3 Retail Stocks I'm Watching This Holiday Season

The holiday shopping season is the most important time of year for retailers. This year, holiday retail sales are expected to climb 4% marking their strongest growth since 2011, according to the International Council of Shopping Centers. This will mean increased competition among major retail chains as they offer better deals and extended store hours in hopes of attracting more customers. Below, three of the Motley Fool's top contributors explain why Amazon (NASDAQ: AMZN), Under Armour (NYSE: UA), and Target (NYSE: TGT) are three retail stocks to watch this holiday season.

Alex Planes: The holidays are a chance to shine (or crumble) for all sorts of retailers, but few of them serve as barometers of America's holiday economic health quite like Amazon.com (AMZN -1.14%), which doubled its fourth-quarter revenue from 2010 to 2013. However, the company's latest projections indicate that Amazon's growth engine will slow down in a big way for this holiday season. The midpoint of company guidance now anticipates the lowest top-line growth Amazon has seen in a very long time:

Sources: Amazon earnings reports.
* 2014 revenue result based on midpoint of company guidance from Q3 2014.

This is certainly troubling for Amazon investors, who have ridden its shares to fantastic returns over the past decade on the heels of monster revenue growth. Amazon's razor-thin to nonexistent profit margins -- Vox's Matthew Yglesias has called it "a charitable organization being run by elements of the investment community for the benefit of consumers" -- have always led to super-premium valuations because investors have for years seemed to expect Amazon to eventually squeeze some profit out of its fast-growing top line. If Amazon's revenue growth begins to stall without any notable uptick in profit, it might finally convince investors that the long-term promise of profit simply doesn't match up to any observable reality.

But beyond immediate concerns of a slowing top line to Amazon investors, Amazon's slowdown could also signal weakness in the American economy. E-commerce made up a full 7% of all American retail sales in the fourth quarter of 2013, which is up from 4.7% of all retail sales five years ago. E-commerce has been one of America's few bright spots in a humdrum post-crisis retail landscape, and Amazon has taken a larger share of America's e-commerce sales each year. Last year, it accounted for almost one out of every five dollars spent on e-commerce in the fourth quarter:

Sources: Amazon earnings reports and U.S. Census Bureau.
* E-commerce data not seasonally adjusted. Amazon's share based on North American sales.

We're coming up on the six-year anniversary of our current bull market. Marketwide valuations have risen to highs only seen near the peaks of previous historic highs. We've yet to see any consistently bright warning signs for a market correction like there were in mid-2008, but weak e-commerce sales could be a canary in the coal mine for America's economy -- and Amazon has become the beating heart of that canary. I'm watching Amazon this holiday more for what it represents than for what it actually is to my portfolio, since I have no stake in its shares and have no intention of buying any in the near future.

Joe Tenebruso: One of the retail stocks I'll be watching most closely this holiday season is Under Armour. As it is for many retailers, the November to December period is typically the most important time of the year for the hard-charging sports apparel maker, as shoppers conduct a large portion of their yearly purchases during this period. Under Amour's fourth-quarter results will therefore give us another clue as to the health of the American consumer, as well as the retail industry as a whole.

But beyond just a myopic focus on U.S. macroeconomic trends, I'll be searching for more evidence of Under Amour's successful expansion into international markets. That's because I believe this segment can be a multi-decade growth opportunity for Under Armour. Non-US revenue currently comprises only 9% of UA's total revenue, yet international sales have been exploding higher, to tune of 94% year-over-year growth in the third quarter. I expect this segment to steadily become a larger percentage of Under Amour's overall sales base, as the company accelerates its expansion plans in China and enters key new markets such as its recent launch in Brazil.

I'll also be watching for continued growth in Under Armour's direct-to-consumer business. This segment is becoming increasingly important as e-commerce grows larger as a percentage of global retail sales – a trend I expect to continue for the foreseeable future. In the third quarter, direct-to-consumer revenue increased 35% year-over-year and now comprises 26% of Under Armour's total revenue. I'll be watching for continued strong growth in this segment, and I believe it can ultimately represent more than 50% of Under Armour's total sales. That would be a boon to UA investors, because those companies that prove they can compete – and win – in an e-commerce-driven world should deliver handsome returns to their shareholders for years to come.

Tamara Walsh: Target is one of the top retail chains to watch this holiday season because unlike other retailers such as Amazon, Target can't afford to lose customers this year. The big box store suffered a weak turnout in 2013 after various missteps including the massive security breach between Thanksgiving and Christmas, which left tens of millions of Target customers vulnerable to credit card fraud. Investors pushed Target's stock lower as a result. However, Target's renewed focus on exclusive product launches and one-of-a-kind designer collaborations should help put the bullseye company back on top this holiday season.

Source: Target. 

Target is already off to a promising start this season thanks to its strategic partnership with TOMS. The TOMS for Target collection hit Target stores and the company's e-commerce site on Nov. 16 and many items sold out in a matter of hours. I visited my local Target store around noon that day and the only things left were a handful of TOMS + Target notebooks and two candles.

The charity angle of this collaboration is another reason the partnership is a hit with consumers. Toms one-for-one model, which gives a pair of shoes to a needy child for every pair it sells, has catapulted the company into one of the most popular brands on the planet today. This fits well with Target's charitable side, as the company gives 5% of its profit to local communities. This is a smart strategy for the retailer because it makes people feel good about their purchases while also associating that feeling with Target's brand. Nevertheless, there is a lot at stake for Target this season. Ultimately, investors should watch how the big box store performs during the all-important holiday shopping season this year before investing.