2 Retail Stocks to Buy Before the Holiday Shopping Season

Amazon enters the holiday quarter with year-to-date revenue growth accelerating from 14% in Q4 to 20% in Q2, while management forecast Q3 growth of 9%–12% (13%–16% excluding the Prime Day timing shift); its shares trade near $254, about 11% below the $284.02 record close. Costco’s September comparable sales rose 7.6% excluding gas and FX, versus 6.7% in its prior holiday quarter, but its shares near $986 trade at about 47 times fiscal 2026 earnings. The article favors Amazon at its current valuation and suggests buying Costco gradually; Amazon’s trailing-12-month free cash flow was an outflow of about $7.6 billion, partly reflecting AI-related spending.

Analysis

The key distinction is earnings sensitivity, not just sales momentum. Amazon has greater potential holiday-quarter operating leverage in retail, while AWS demand is a separate driver that could support the return on its AI investment. The offset is execution: elevated infrastructure spending leaves free cash flow vulnerable if capacity growth leads cloud demand or retail margins disappoint. A strong holiday sales print alone would not resolve that concern; watch operating income and capex commentary.

Costco’s renewal income makes earnings less dependent on holiday shopping than its seasonal sales pattern implies. That stability merits a premium, but at the valuation described, investors have little cushion if comparable-sales growth normalizes or wage, freight, and shrink costs absorb incremental sales. Strong Costco demand may also pressure discretionary retailers such as Target more than it changes total consumer spending, as value-seeking shoppers shift channels.

The near-term catalyst is Amazon’s Q3 report and holiday guidance; Costco’s monthly sales reports offer faster confirmation of traffic and basket trends. Over 6–18 months, Amazon’s upside depends on monetizing AI capacity without persistent cash-flow deterioration. Costco’s defensiveness may hold up in a softer consumer backdrop, but multiple compression is the main downside risk. Contrarian point: Costco’s sales acceleration is not equivalent to a comparable acceleration in earnings, while Amazon’s weaker share price does not by itself establish undervaluation.

Key Decisions for Investors

• Prefer a staged long in AMZN over adding to COST at current levels. Consider initiating only a partial position ahead of Amazon’s Q3 report and add after the release if holiday guidance is sound and North America operating income remains healthy.
• Treat AWS growth and cash conversion as the confirmation metrics for AMZN: reduce or abandon the thesis if AWS growth materially slows while capex continues rising, or if retail sales growth fails to translate into operating income.
• Avoid chasing COST after its recent run. Reassess after November–December sales reports; stronger comparable sales would support the operating thesis, but not automatically justify the multiple. Falsification: sustained comparable-sales deceleration or evidence that operating income is lagging sales growth.
• A long-AMZN/short-COST relative-value position is a possible valuation expression, but keep it modest and preferably risk-defined: Costco’s defensive demand and premium valuation can persist, so the short is vulnerable to a consumer slowdown or further multiple expansion.