The retail sector hogs all the attention with the advent of the holiday season. It is time you look beyond the woebegone market and lift your spirits. One way of doing this is by adding potential winners to your portfolio. Retail stocks get a push during the holiday season, which is a make-or-break time for retailers. And as the countdown to Black Friday begins, investors, too, scurry for the bright spots in the space.

Eye-popping Black Friday deals are the next most important to the Christmas shopping bonanza. Apart from price-matching policies, retailers try to sweep buyers off their feet with early-hour store openings, huge discounts, promotional strategies and free shipping on online purchases. Competition is at its height as retailers cross swords. And since the markets are shaky thanks to global economic turbulence and financial-market volatility, retailers do have reasons to worry.

Nonetheless, the recently released U.S. GDP data revealed a growth rate of 2.1% in the third quarter, better than the initial estimate of 1.5%. So in spite of coming in much below the 3.9% growth registered in the second quarter, the reasons to cheer are aplenty.  

A rebounding U.S. economy has the retail space bubbling with optimism. A gradual recovery in the housing market, along with lower gasoline prices, and an improving labor market – with the unemployment rate reaching a seven-year low of 5% – are favoring the economy and playing key roles in raising buyers’ confidence. We expect this positive sentiment to translate into higher consumer spending.

The busiest part of the year accounts for a sizable chunk of yearly revenues and profits of retailers. Data compiled by eMarketer suggests a 5.7% jump in holiday sales (November and December) to $885.7 billion, while National Retail Federation (NRF) projects a 3.7% sales increase for the period to $630.5 billion (excluding autos, gas and restaurant sales).

Retailers will go the extra mile to draw bargain hunters. But we wonder whether the promotions and deals will come at the price of margins, or even bottom-line growth. Some retailers will emerge as winners while some will bite the dust.

What to Stock Up On

Investors can count on BJ's Restaurants, Inc. (BJRI - Analyst Report), which is one of the few casual dining chains that has been expanding. We are encouraged by the company’s Project Q initiatives, menu innovation, prudent expansion, and marketing and operational initiatives, which are expected to boost sales. Given its operational efficiency and the launch of a new higher return restaurant prototype, the company would continue to grow its margins. The stock currently flaunts a Zacks Rank #1 (Strong Buy).

Another solid bet is Foot Locker, Inc. (FL - Analyst Report) carrying a Zacks Rank #2 (Buy). The company is one of the widely recognized names in the athletic footwear and apparel industry. The company’s stellar performance is backed by the effective implementation of its operational and financial initiatives. Management believes that by continually exploiting opportunities in kids’ and women’s business, shop-in-shop expansion in collaboration with its vendors, and its store banner.com business, store refurbishment and enhancement of assortments, Foot Locker is likely to benefit in the long run. Management expects to attain double-digit growth in earnings per share in the fourth quarter of fiscal 2015.

We also suggest parking money in Amazon.com, Inc. (AMZN - Analyst Report) –– one of the largest e-commerce companies in the world. Although the primary product line was initially books, the company rapidly diversified into a host of other product categories. Product selection, superior user experience, bargains and customer feedback have helped the company to build a strong position for itself in this fast-growing market. The growth of the e-commerce industry, with consumers increasingly buying online, is a dynamic favoring the company. The stock holds a Zacks Rank #2.

Stocks that May Succumb

Macy's, Inc. (M - Analyst Report) is a stock that investors should rid their portfolio of, before it hurts returns. A look at Macy’s top-line performance, unveils lower-than-expected sales in the last eight quarters. In the recently concluded third-quarter fiscal 2015, the company generated net sales of $5,874 million that declined 5.2% year over year and fell short of the Zacks Consensus Estimate of $6,151 million. Subdued consumer demand primarily in the apparel and accessory categories, and lower spending by international tourists due to a stronger dollar dampened the performance of the company. Macy’s now expects total sales for fiscal 2015 to decline 2.7% to 3.1%, from its previous guidance of a 1% decrease. The stock carries a Zacks Rank #4 (Sell).

Another stock which equity hunters should maintain safe distance from is The Gap, Inc. (GPS - Analyst Report). The company’s sales trend has been dismal for a while now, mainly hurt by intensifying currency headwinds. Further, disappointing performance by its core Gap and Banana Republic Global brands are pressing concerns for the company. The persistence of these headwinds is likely to dent the top line and weigh on Gap’s overall performance. Net sales of $3,857 million during the third quarter of fiscal 2015 dropped 2.9% year over year and missed the Zacks Consensus Estimate of $3,875.2 million. This Zacks Rank #5 (Strong Sell) stock also lowered its fiscal 2015 earnings per share guidance to $2.38–$2.42 from $2.75–$2.80 predicted earlier.

Bottom Line

The holiday season is the most crucial part of the year for retailers focusing on building revenues and profits perhaps also to make up for a past dismal performance. It’s no surprise that footfall increases at this time but what’s important is how tactfully retailers convert them into potential buyers.