The holidays are prime time for retail stocks, but obviously things are very different this year. Online shopping has graduated from convenience to necessity. A burst of mid-October sales events by five of the country's most successful chains threatens to take the bite out of this season's holiday buying across all concepts even if Black Friday and Cyber Monday sales were relatively decent.

There are a lot of moving parts here. We've lost a few wobbly operators along the way, but we're Santa sleigh deep in a recession. Some retail stocks will still shine in this climate, but many of them won't. Five Below (NASDAQ:FIVE), Target (NYSE:TGT), and Tanger Factory Outlet Centers (NYSE:SKT) are three of the top retail stocks to buy this month, and I will prove it to you.

A shopper holding different bags while riding up on an escalator.

Image source: Getty Images.

Five Below

There's a big difference between a cheap price and a bargain, especially to teens and preteens. Dollar stores are mostly full of junk in their discerning eyes. Five Below stands out as a haven of "cheap chic" splendor, with a wide range of items priced $5 or less that they actually aren't embarrassed to buy.

Five Below was positioned well ahead of last week's quarterly report, and it delivered. Net sales soared 26% to $476.6 million in its fiscal third quarter. Brisk expansion has helped. Five Below opened 36 net new stores during the quarter, knocking off a meaty four-figure milestone to have 1,018 locations at the end of October. Business has recovered nicely at the unit level, as comps rose 12.8% in the fiscal third quarter.

Positive comps are impressive enough in this climate, as we're comparing the average store's performance to where it was a year ago in pre-COVID times. Five Below is killing it by checking in with double-digit comps growth. The bottom line is faring even better, as net income in last week's report doubled to $0.36 a share. Analysts were expecting a profit of just $0.20 a share.

Five Below has now blasted through analyst estimates in back-to-back quarters. Some chains will take a few more quarters, if not a couple of years, to bounce back, but Five Below is thriving in the new normal.


Another "cheap chic" retailer that's coming through with double-digit comps in this climate is Target. The mass-market discounter saw its same-store sales surge 20.7% in last month's fiscal third quarter report.

Unlike Five Below, Target never had to close during the initial phase of pandemic-related shutdowns. Selling groceries and other essentials will keep you open during government-ordered lockdowns. Target also differs from Five Below in that it has a strong digital presence. Five Below is just starting to get its e-commerce game going, but Target's rolling strongly on the that front. Digital comps skyrocketed 155% in its latest quarter, and we're not talking about old-school e-tail. Same-day services in the form of online ordering for in-store pickups, curbside drive-up, and Shipt orders have combined to more than triple over the past year.

Tanger Factory Outlet Centers

If you're hesitant to put your money on a single retail stock, you can always bet on the entire shopping center. The problem with siding with the landlord instead of the tenant with this approach is that a lot of players are closing up shop, and that makes traditional malls a risky investment.

Tanger Factory Outlet Centers is an operator of 38 upscale outlet shopping centers. It's had a few of its tenants go under, and its consolidated portfolio occupancy rate has dipped to 92.9%. Those vacancies will be easier to fill now that shoppers have returned. Traffic is at 98% of where it was a year ago, even though stores are often operating on shorter hours.

Tanger Factory Outlet Centers is a real estate investment trust (REIT), but it suspended its distributions in the spring. The payouts will resume next year if Tanger remains profitable, and those disbursements can be pretty substantial if it's able to return to form sooner rather than later. The REIT would be yielding 13.5% if it was back to earning enough to cover its April distribution rate.

Whether you prefer the high growth ceiling at Five Below, the all-weather charm of Target, or the potential payouts awaiting Tanger Factory Outlet Centers, these are the three top retail stocks to consider buying in December.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.