TD Cowen's Oliver Chen shares his top retail picks for 2026

Key Concepts

• K-Shaped Economy: A divergence in economic performance where high-income earners thrive while low- and middle-income earners struggle.
• Duopolistic Industry: An industry dominated by two companies (e.g., eyeglasses).
• Net Promoter Score (NPS): A metric measuring customer loyalty and willingness to recommend a company.
• Digital Innovators: Companies that leverage technology to disrupt traditional business models.
• Marketplace AI: Utilizing artificial intelligence to enhance online retail platforms.
• Bifurcation of Consumer Behavior: The disconnect between strong consumer spending and weak consumer sentiment.
• Willingness to Pay Model: A business model reliant on customers being prepared to pay a premium for products or services.

Retail Outlook for 2026: A TD Cowen Analysis

Introduction

The discussion centers on retail investment opportunities for 2026, following strong recent performance from companies like Warby Parker (up 31%), American Eagle (up 30%), and Victoria’s Secret. TD Cowen Senior Retail Analyst Oliver Chen provides insights into current trends and top stock picks, particularly focusing on the impact of the “K-shaped economy” and evolving consumer behavior.

Strong Performers & Future Potential

Recent successes in the retail sector include Warby Parker, experiencing its best month in over two years, and American Eagle reaching its highest level since 2021. Chen highlights Warby Parker’s unique position in a duopolistic eyeglasses industry, citing high Net Promoter Scores (NPS) indicating strong customer satisfaction, its partnership with Google on future glasses technology, continued store expansion, and competitive pricing. He maintains a “Buy” rating for Warby Parker. Levi’s is also identified as a strong contender within the denim market, with American Eagle’s recent success partially attributed to its Sydney Sweeney denim campaign (though pajamas are also a significant seller).

The Walmart Thesis & the K-Shaped Economy

Chen’s top recommendation is Walmart, a position held for several years. He argues Walmart effectively caters to consumers across all income levels, from lower to higher, and is a prime beneficiary of the observed K-shaped economy. This economic model, according to Chen, is “very real,” characterized by pressure on low- and middle-income consumers who haven’t fully participated in recent market gains. He notes that the top 20% of the population accounts for 50% of consumer spending.

Walmart’s strength lies in its ability to provide both “defense” (essential goods at low prices) and “offense” (higher-end items like diamonds), exemplified by Chen’s own $50 blazer from Walmart’s Free Assembly line. The company’s success is attributed to Walmart Plus, its marketplace, AI integration, strong apparel trends, and its established reputation for “everyday low prices.” Chen emphasizes his personal experience growing up with Walmart’s Supercenters, highlighting their competitive pricing on organic food, pharmacy items, and groceries – a traditionally low-margin business.

Costco & Luxury Retail: Complementary Strategies

Alongside Walmart, Chen also favors Costco, recognizing its similar appeal to a broad consumer base. He acknowledges a previous discussion about Costco’s impact on GDP. In the luxury segment, Chen recommends Richemont and Cartier, suggesting a diversification strategy.

Challenges in Specialty Retail & the Volatility of Fashion

The conversation acknowledges the inherent volatility of the retail landscape, particularly in specialty retail and fashion. Mall traffic has been consistently negative, leading to a cycle of “winners and losers.” Chen emphasizes that retail investors seek “timelessness” in brands, a quality often lacking in fast-fashion trends. He notes that apparel is a particularly challenging category due to numerous low-cost alternatives and a reliance on a “willingness to pay” model.

The Consumer Crossroads: Sentiment vs. Spending

A key argument presented is the “bifurcation” of consumer behavior. Despite strong economic fundamentals – low unemployment and wage growth outpacing inflation – consumer sentiment remains weak. This creates a challenging environment for retailers, requiring them to adapt and execute effectively.

The Role of AI & Future Trends

Chen highlights the growing importance of Artificial Intelligence (AI) in retail, suggesting it’s a “major story” shaping the industry. He also points to the potential of beauty and wellness categories, specifically recommending Ulta, as areas offering more stable growth prospects.

Notable Quotes

• Oliver Chen: “Walmart’s capturing the lower and middle income consumer as well as higher household income.”
• Oliver Chen: “The K-shaped economy looks very real to us, because what we're seeing in our data and our research is lots of pressure at the low and middle income consumer.”
• Oliver Chen: “Retail investors are looking for timelessness.”
• Oliver Chen: “The consumer is really at a crossroads with lots of things happening, meaning the consumer is very fundamentally strong, with low unemployment and wage growth outpacing inflation. But the consumer is sentimentally weak.”

Conclusion

The analysis suggests a cautious yet optimistic outlook for retail in 2026. Walmart emerges as the top pick, capitalizing on the K-shaped economy and offering both stability and growth potential. Costco and luxury brands like Richemont and Cartier are also recommended. The discussion underscores the importance of understanding evolving consumer behavior, embracing AI, and focusing on categories offering greater resilience in a volatile market. The key takeaway is that navigating the current retail landscape requires a nuanced approach, recognizing the disconnect between economic fundamentals and consumer sentiment.