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3 Top Stocks That Can Profit From Black Friday

By Todd Campbell - Nov 23, 2018 at 6:25AM

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You might want to add these retailers to your portfolio's wish list while you're hunting for gifts for family and friends this weekend.

The Friday after Thanksgiving is known as Black Friday partly because it marks the first day of the year that retailers turn a profit, and this year, the profit they're going to be able to turn could be much bigger than last year's. According to the National Retail Federation, holiday shoppers will spend 4.1% more this year than they did last holiday season. It remains to be seen which companies capture the bulk of this growth this season, but three retail stocks that investors should consider buying are Kohl's (KSS 2.27%), Ollie's Bargain Outlet Holdings (OLLI 4.50%), and Etsy (ETSY 6.21%).

Sears Holdings' slide is a boon to this department store chain

Kohl's generates about 30% of its annual sales in November and December, and this year, those sales could benefit if shoppers shift to it from Sears due to rising concern over Sears' bankruptcy.

A man standing as $1 bills fall down around him.

IMAGE SOURCE: GETTY IMAGES.

Kohl's predominately sells apparel, footwear, accessories, and beauty and home products. Apparel and soft home goods like bedding account for roughly 32% of Sears' merchandise revenue, or roughly $4.3 billion in revenue last year.

Kohl's reported its latest quarterly results this week, and they suggest it has momentum heading into Black Friday, when it plans to offer bargain prices on electronics and toys to help drive foot traffic.

It saw 2.5% comparable sales growth last quarter, and improving inventory boosted its margin, helping its earnings per share surge 40% higher than one year ago. Department stores must compete against e-commerce, but Kohl's is making progress on the digital side of its business too, and that's helping offset some of the risk from companies like Amazon.com. Last quarter, its digital revenue grew at a mid-teens rate.

It remains to be seen how much of a tailwind Sears' struggles will be for Kohl's this season, but on its quarterly conference call, management told investors that it thinks competitive store closures (eh-hem, Sears) are boosting results at up to one-third of its 1,100 stores. If that trend continues, this could be a good time to buy Kohl's shares, because its share price tumbled 10% following its earnings release, despite results outpacing industry watchers' forecast and management upping its full-year earnings-per-share guidance to $5.16 to $5.36 from $4.96 to $5.36 previously.

A tag that reads "for sale."

IMAGE SOURCE: GETTY IMAGES.

Everybody loves a bargain

People love "good stuff cheap" all year long, but they especially enjoy a bargain during the holidays, which are the busiest time of the year for Ollie's Bargain Outlet, a 22-state, 300-store chain.

The retailer sells brand-name "food, housewares, books and stationery, bed and bath, floor coverings, electronics and toys" that it buys at cut-rate prices from manufacturers, wholesalers, distributors, and retailers who are overstocked or closing. For example, Ollie's acquired $200 million in toys from suppliers when Toys R Us closed its stores forever.

The bargain business has been a good one. Ollie's sales grew at a compound 17% rate between 2012 and 2016. In 2017, its sales increased 21% to $1.08 billion, due in part to its store count increasing by 14%. There's plenty of opportunity for it to open more stores too. The company operates in less than half the country currently, and management thinks the U.S. could eventually support more than 950 stores.

Perfectly wrapped holiday presents on a rustic table.

IMAGE SOURCE: GETTY IMAGES.

One-of-a-kind growth

It would be easy to recommend Amazon.com to investors as a top stock to buy this holiday season. After all, it's the de facto e-commerce Goliath, and it produces 34% of its annual revenue in the fourth quarter. Instead, I'm recommending its much smaller and, dare I say, "craftier" competitor, Etsy. Like Amazon, Etsy makes its money from e-commerce, but unlike Amazon, Etsy profits most from the sale of one-of-a-kind goods made by individuals rather than mass-produced goods made by companies.

Etsy's online marketplace connects nearly 2 million creative entrepreneurs with more than 33 million active shoppers on the hunt for unique items. Each time a sale is made, Etsy pockets 3.5% of the purchase amount for its trouble. Etsy also makes money from listing fees and seller services, including promoted listings and Etsy Payments, its tool for accepting online payments.

Those small percentages and service fees add up to big bucks for investors. Etsy shoppers bought $3.3 billion in merchandise in 2017. As a result, Etsy's marketplace revenue grew 13.5% year over year to $179.5 million, and its seller services revenue grew 28.7% year over year to $258.5 million last year.

Etsy's growth is accelerating ahead of Black Friday, too. In the third quarter, its revenue surged 41.4% year over year to $150.4 million, and its $0.15 in earnings per share clocked in $0.08 better than analysts were expecting. Those results prompted management to increase their revenue forecast for this year to at least $3.87 billion from $3.84 billion previously, which is a 35% increase from 2017.

Of course, shoppers can be fickle, and there's no guarantee that Kohl's, Ollie's Bargain Outlet, and Etsy will continue their winning ways this holiday season. Nevertheless, I think they have a good shot at rewarding investors with better-than-expected sales on Black Friday and beyond this year. If they do, including them in portfolios now could be smart.

 

 

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Stocks Mentioned

Kohl's Corporation Stock Quote
Kohl's Corporation
KSS
$39.25 (2.27%) $0.87
Etsy, Inc. Stock Quote
Etsy, Inc.
ETSY
$83.62 (6.21%) $4.89
Ollie's Bargain Outlet Holdings, Inc. Stock Quote
Ollie's Bargain Outlet Holdings, Inc.
OLLI
$63.43 (4.50%) $2.73
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$116.46 (3.58%) $4.02
Sears Holdings Corporation Stock Quote
Sears Holdings Corporation
SHLDQ

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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