Major benchmarks drifted lower on light volume in an abbreviated trading session Friday. The Dow Jones Industrial Average (DJINDICES:^DJI) and the S&P 500 (SNPINDEX:^GSPC) closed down after recent record highs. All 11 S&P sectors declined.

Today's stock market

Index Percentage Change Point Change
Dow (0.40%) (112.59)
S&P 500 (0.40%) (12.65)

Data source: Yahoo! Finance.

Market watchers will be picking through retail stocks in the coming weeks to find the winners in a strong environment for consumers. Etsy (NASDAQ:ETSY) and Five Below (NASDAQ:FIVE) are two fast-growing retailers hoping for big holiday sales.

Falling bar graph.

Image source: Getty Images.

Etsy is sacrificing profit for long-term growth

Craft marketplace Etsy is hoping holiday shoppers show more interest in its merchandise than investors have been showing in its stock lately. Shares are down 9% this year and slipped 2.3% today. If recent experience in any guide, shoppers will, but investors may need more convincing.

Etsy's gross merchandise sales (GMS) soared 30% to $1.2 billion in the third quarter, which was an acceleration from 21% growth in Q2 and 19% growth in Q1. Some of that increase came from the company's purchase of online musical instrument seller Reverb, but even excluding the results of that transaction, GMS grew 23% in constant currency, giving Etsy 28% revenue growth on that basis.

What has investors hesitant to click the buy button is probably Etsy's bottom line, which has taken a hit as the company makes investments to attract more business. Etsy is pushing its sellers to offer free shipping, and that move -- as well as higher development costs to improve its platform -- is hurting the company's margins.

But Esty bulls point out that the e-commerce specialist continues to attract growing numbers of buyers and sellers, a trend that could easily continue if the company's investments pay off.

Five Below builds stores and bets on Frozen 2

Shares of discount retailer Five Below have gone mostly sideways this year and were flat today as investors wait to see if the company's recent moves pay off with continued growth in the holiday quarter.

Five Below will announce Q3 results next week, but the company delivered solid sales and profit growth in the second quarter. Net sales increased 20% to $417 million on comparable-sales growth of 1.4% and earnings per share rose 13% to $0.51. Growth stock investors like the fact that the company is building stores at a rapid pace, adding 83 new stores in the first half to bring the total to 833, with plenty of room left to expand into new markets.

The company has done a good job of mitigating the effects of tariffs, is adding a few higher-priced items, and has gone all-in on Frozen 2 merchandise, which it started selling in early October. That could prove to be a savvy move given the early success of the Disney release.