'Boujee on a budget' consumers can power these stocks through tariff headwinds, analysts say

Retailers offering value and discount pricing, like Costco, Walmart and especially BJ's Wholesale, are expected to outperform despite tariff headwinds and consumer uncertainty, as highlighted by TD Cowen and JPMorgan analysts; BJ's is favored for its growth potential and defensive characteristics, while Costco and Walmart are considered pricier. Beauty retailers, particularly those offering affordable alternatives to luxury brands like Elf Beauty, are also poised for growth due to strong consumer loyalty and the perception of cosmetics as essential goods, though Elf's reliance on Chinese manufacturing poses a risk.

Analysis

The U.S. retail sector, as indicated by the SPDR S&P Retail ETF (XRT) being down 3.9% year-to-date, faces headwinds from global trade uncertainty, inflation, and wavering consumer confidence, despite a recent 15% rebound in the XRT over the past month. Analysts anticipate that retailers offering strong value propositions and catering to both consumer needs and wants will outperform. This trend, termed "intensification of bifurcation" by TD Cowen, favors high-end retailers and those providing exceptional value. Warehouse clubs like Costco (COST) and BJ's Wholesale (BJ), alongside Walmart (WMT), have demonstrated resilience, outperforming the S&P 500. BJ's is particularly highlighted by TD Cowen as its "best retail idea for 2025," citing its store expansion potential and broader grocery offerings, despite trading at 27 times forward earnings. Costco, with a P/E over 56, and Walmart, with a P/E of 37.6, are considered strong long-term holds but appear expensive. JPMorgan also views BJ's as a defensive play, noting accelerated spending in wholesale clubs and its low tariff exposure, though maintains a neutral rating due to valuation and EPS growth uncertainty. The beauty sector, exemplified by Elf Beauty (ELF), is also seen as attractive due to consumer loyalty, product replenishment cycles, and the perception of beauty items as essentials, allowing for price pass-through. Elf Beauty, known for affordable luxury alternatives, has seen its stock fall over 36% YTD, partly due to its reliance on Chinese manufacturing amidst tariff concerns, but has rebounded 50% in the last month, with analysts remaining largely bullish. BJ's shares are up 32% YTD, Costco 12%, and Walmart 8.6%.

Key Decisions for Investors

• Investors should prioritize retailers demonstrating strong value propositions and a blend of essential and discretionary goods, such as warehouse clubs and select discount retailers, which are expected to navigate ongoing tariff and consumer uncertainties more effectively.
• Consider BJ's Wholesale (BJ) for its growth potential and defensive characteristics, but closely monitor its valuation (currently 27x forward P/E) and the company's ability to achieve consistent high single-digit to low double-digit EPS growth.
• Evaluate positions in beauty retailers like Elf Beauty (ELF), recognized for brand loyalty and pricing power, while remaining vigilant about geopolitical risks, particularly U.S.-China trade relations, given ELF's significant sourcing from China.
• While Costco (COST) and Walmart (WMT) exhibit strong fundamentals, their current elevated valuations (P/E ratios of 56x and 37.6x respectively) warrant caution for new capital deployment; existing positions may be held, but upside could be limited in the near term.