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Summary
- The retail sector was a divided industry in 2025 due to the K-shaped economy.
- Affluent consumers flocked to premium luxury brands, while middle and lower-end consumers hunted for bargains and 'small indulgences'.
- Three companies are set up to capitalize on both ends of this trend: ULTA Beauty, Five Below, and Tapestry.
2025 was a rocky year for the retail sector. Retailers had to play a game of dodgeball against the tariff schedule while dealing with high rates, lingering inflation, and floundering consumer sentiment.
But despite a barrage of headwinds, the American consumer came through once again. S&P 500 companies posted above-average earnings through Q3 2025, and analysts have once again increased estimates for Q4 results (which have already started rolling in). Can retailers once again thread the needle in 2026? In this article, we’ll look at a few big winners in the retail sector last year who are still flashing bullish signals today.
A strange investment indicator discovered nearly a century ago has reappeared — and analysts say its warning couldn't come at a more critical time. While many investors believe the worst of the volatility is behind us, this signal suggests a far more significant market shift may be forming.
According to historical patterns, certain types of stocks tend to bear the brunt of this transition. Weiss analysts have highlighted five companies that may be especially exposed if the current trend accelerates.
See the 5 stocks analysts say to avoid now
Navigating a Divided Retail Sector
The K-shaped economy was a central theme in 2025, as affluent consumers boosted high-end brands while lower and middle-class consumers buttoned down their budgets. The result has been a bifurcated retail sector, where both luxury brands and discount stores thrive while others get stuck in the middle. Sorry, Target Corp. (NYSE: TGT).
One new developing trend among younger consumers is a preference for ‘small indulgences’. Beauty and lifestyle brands have been among the biggest beneficiaries of this trend, as affordable luxuries with lasting appeal are more desirable to cautious consumers than big-ticket items.
Discount retailers have also benefited from the small indulgences trend, especially those that offer a unique in-store experience. Several companies that provide affordable luxuries AND in-store experiences have seen their stocks rewarded over the last year.
3 Roaring Retail Stocks With More Room to Run
Considering the trends pacing the retail industry, it's not hard to see why the stocks selected here have performed well. Each company has produced earnings growth ahead of the pack and boasts a loyal customer base that helps brace against any potential economic slowdown.
ULTA Beauty: Sitting at the Top of the Affordable Luxury Totem Pole
It took shares of ULTA Beauty Inc. (NASDAQ: ULTA) more than 18 months to reclaim the all-time high set in March 2024, but a series of new measures has spurred an impressive turnaround.
The stock is up more than 50% in the last 12 months and could be headed for another year of outperformance if current trends continue.
ULTA posted its fifth straight top- and bottom-line earnings beat on Dec. 4 for Q3 of its fiscal 2026. Comp sales were 6.3% year-over-year (YOY) in Q3 2026, the second straight quarter with comps over 6%.
Management once again raised full-year guidance, now expecting $12.3 billion in net sales with an EPS range of $25.20 to $25.60.
Of course, as is usually the case with ULTA, CEO Kecia Steelman exercised caution with Q4 comp projections with a conservative guide of 2.5% to 3.5%.
ULTA’s fragrance, skincare, and wellness categories continue to perform above expectations, and gross margins now top 40%, putting the company in the driver’s seat of the ‘affordable luxury’ spectrum. The stock also continues its uptrend, with strong support along the 50-day simple moving average (SMA) and a Moving Average Convergence Divergence (MACD) indicator that’s curling upward once again.
Five Below: Discount Powerhouse with Impressive Comps
At the other end of the income ladder is Five Below Inc. (NASDAQ: FIVE), a company that was expected to feel the full impact of tariffs due to its high reliance on Chinese imports.
But in fact, the opposite has happened. Five Below has shrugged off tariff worries to deliver impressive sales in 2025, and its stock has nearly quadrupled since the Liberation Day lows in April.
Once again, the comp sales tell the tale. Here’s how Five Below’s comps looked during their first three reports of 2025:
- Q1 2025: 7.1% YOY comps
- Q2 2025: 12.4% YOY comps
- Q3 2025: 14.3% YOY comps
One of the biggest reasons for the outsized comp growth is Five Below’s focus on the in-store experience. The company’s new “Five Beyond” initiative has added more margin-friendly goods to store shelves, with prices often reaching $20 to $25. Over 1,800 stores are now in operation, and the balance sheet is clear as a window with zero debt.
The chart here looks similar to ULTA’s, with strong support along the 50-day SMA and a resurgent upswing on the MACD. FIVE shares show the tell-tale signs of a bullish uptrend, and its stock is likely to continue making new highs in 2026 as lower-income and younger consumers are drawn to bargains and store experiences.
Tapestry: Coach Continues to Provide Upward Momentum
Coach and Kate Spade parent Tapestry Inc. (NASDAQ: TPR) may not offer the affordability of ULTA, but its brands are hot amongst affluent shoppers. And no brand has been hotter than Coach.
The desirable handbag line posted 21% YOY sales growth in fiscal Q1 2026 results reported on Nov. 6, helping drive overall revenue to $1.7 billion (13% YOY growth).
Stable sales have also helped the company return value to shareholders; it pays an annual dividend of $1.60 and repurchased more than $2 billion of its stock in 2025.
Management expects to return another $1.6 billion to shareholders through dividends and buybacks in 2026, and raised full-year 2026 revenue guidance to $7.3 billion during the most recent conference call.
TPR shares also have the trademark bullish signature on 50-day and 200-day SMAs, but the Relative Strength Index (RSI) has breached the Overbought threshold again, hinting that a healthy pullback could be on the horizon. If TPR shares pull back to the 50-day SMA, investors could have an excellent opportunity to buy in at a reasonable entry point.
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