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With Thanksgiving round the corner, a busy period is coming up for retail stocks. After all, Thanksgiving is the unofficial start of the holiday shopping season with Black Friday, the day after Thanksgiving, being one of the busiest shopping days of the year. In fact, it is not an uncommon sight to see people queuing up outside stores from the wee hours to take advantage of attractive deals and offers including early bird discounts.

Black Friday is a very important day for e-commerce stocks and retailers with many companies reporting their highest profits on this day. The holiday season gives retailers the opportunity to improve traffic and bring in the numbers. Advertisements are already out with companies like Amazon.com, Inc. (AMZN - Free Report) , Target Corp. (TGT - Free Report) , Wal-Mart Stores Inc. (WMT - Free Report) , Kohl's Corp. (KSS - Free Report) and many others coming up with Black Friday deals.

Amazon’s gone a step further and announced more than 35 days of Black Friday shopping starting Nov 16 and ending Dec 22. The company has promised new deals as often as every five minutes.

What do the Numbers Say?

According to an annual survey released last week by the National Retail Federation (NRF) and Prosper Insights & Analytics, consumers are eagerly awaiting the deals on offer for the biggest shopping weekend of the year with about 137.4 million people (59% of Americans) expected to shop this weekend (Thanksgiving Day, Black Friday and Small Business Saturday plus Sunday). These numbers include in-store as well as online shopping and represent an increase from 58.7% or 135.8 million people last year.

The NRF estimates that sales (excluding autos, gas and restaurant) in November and December will grow 3.6% to $655.8 billion, much higher than the 10-year average of 2.5% and the 7 year average of 3.4% since 2009. This includes non-store sales growth of 7% - 10%. Spending in U.S. households already ramped up in October with retail sales growing 0.9% over September and 2.2% from the year-ago period (NRF data).

Factors like an improving labor market and solid wage gains should bode well for retail stocks including the traditional brick and mortar stores that have been facing challenges due to a shift in consumer preferences towards online shopping.

Stock Picks

With expectations high for a positive holiday season, here is a look at three retail stocks that boast of a favorable Zacks Rank and a VGM score of A or B. Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer the best upside potential.

Best Buy Co., Inc. (BBY - Free Report) : Richfield, MN-based Best Buy is a Zacks Rank #1 stock with VGM score of A and a stellar earnings history. The company surpassed earnings expectations in each of the last four quarters with an average earnings surprise of 25.66%. The company, which provides technology products, services and solutions through its stores, websites and mobile applications, is seeing upward revisions in earnings estimates for this year (up 6.6%) as well as next year (up 5.3%) over the last 7 days. Best Buy’s expected earnings growth rate for the current year is 17%.

Best Buy’s marketing tagline for the holiday season is “Holiday Gifting Made Easy” with the goal of making holiday shopping effortless for customers. To this purpose, the company has armed an increasing number of associates with tablets that allow them to look at product and customer information and transact. Moreover, additional labor has been deployed around key holiday product categories where customers need more help and in the fast growing in-store pick up area.

BEST BUY Price, Consensus and EPS Surprise

Target: Minneapolis, MN-based Target sells a wide range of general merchandise and food. The stock, which has a VGM score of A, surpassed earnings expectations in three of the last four quarters with an average surprise of 9.85%. While estimates for the current year are up 5% over the last 7 days, next year’s estimates are up 2.5%. The company is expected to deliver earnings growth of 11.1% in the current year. Target is focusing on restoring growth in traffic and comparable sales, with sales growth, a strong gross margin mix and continued cost discipline expected to drive results.  

For the holiday season, Target is well-positioned with its new Cat & Jack collection, a brand that has hit a sweet spot with millennial parents in particular. Moreover, the company which derives about half of its annual toy sales in the fourth quarter, has added nearly 1,800 new and exclusive toys, up more than 15% from last year. Within the electronics segment, Target expects strong demand for new Apple products considering pre-order volume was three times higher than last year. Target’s popular “10 Days of Deals” promotion kicked off on Nov 19 and will continue through Nov 28 in stores and on Target.com.

TARGET CORP Price, Consensus and EPS Surprise

Nordstrom Inc. (JWN - Free Report) : Seattle, WA-based Nordstrom is a leading fashion specialty retailer which operates 348 stores across 40 states, including 123 full-line stores in the U.S., Canada and Puerto Rico; 215 Nordstrom Rack stores; two Jeffrey boutiques; and two clearance stores. The company, which has a VGM score of A, also serves customers online. Nordstrom delivered a “beat and raise” quarter with third quarter earnings surpassing expectations by a huge margin (61.5%). Estimates are on an upward trajectory with earnings estimates for the current year up 8.9% over the last 30 days and next year’s estimates up 6.3%.

NORDSTROM INC Price, Consensus and EPS Surprise

Both Target and Nordstrom are Zacks Rank #2 stocks. You can see the complete list of today’s Zacks #1 Rank stocks here.

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