As part of her initiation of coverage of specialty hardlines retail stocks, Goldman Sachs analyst Kate McShane started Target (TGT) with a Buy rating and added the shares to her firm’s Americas Conviction List, while putting a Sell rating on Bed Bath & Beyond (BBBY) as she expects the retailer to face ongoing sales declines and market share losses. McShane also initiated Walmart (WMT) and Williams-Sonoma (WSM) with Buy ratings, and Dick's Sporting (DKS) and Best Buy (BBY) with Neutral ratings.
COVERAGE INITIATION OF RETAIL SECTOR: In a research note to investors on Thursday, Goldman Sachs' McShane started coverage of several names in the specialty hardlines retail space. The analyst noted that a "solid" macro environment is driving "strong" results, but it is still not impacting every retailer equally. McShane thinks market share gains are the driver of above average growth for the companies with low-to-mid single-digit comparable sales growth or better, which she believes will likely be sustainable as doors continue to close and healthier companies continue to get smarter about their investments in efficiency and the supply chain. Further, the analyst argued that several companies are at an inflection point and starting to see a resumption of operating income dollar growth, demonstrating not only the "strong" top line execution but also a point of leveraging years of investment to become true omni-channel retailers.
BUY TARGET, WALMART: Goldman Sachs' McShane started coverage of Target with a Buy rating and $102 price target, while adding the shares to her firm's Americas Conviction List. Target is starting to benefit meaningfully from door closures, and an inflection in operating income growth should drive accelerating earnings growth, the analyst contended. Meanwhile, she initiated Walmart with a Buy rating and $123 price target, as she expects the company's "aggressive" omni-channel strategy to continue driving "strong" sales growth. Additionally, McShane started Tractor Supply (TSCO) with a Buy rating and $122 price target. The company's locations, largely outside major metros, makes it less exposed to encroachment from same-day delivery and other next-gen ecommerce conventions, the analyst said.
McShane also initiated coverage of National Vision (EYE) and Williams-Sonoma with a Buy rating and a $33 and a $72 price targets, respectively. The analyst sees National Vision as well positioned given the non-discretionary nature of eye exams and eyewear product replenishment, and Williams-Sonoma’s stock levels at an attractive entry point. Initiating Lowe’s (LOW) and Home Depot (HD) with Buy ratings, McShane said she sees both gaining market share and increasing operating dollar growth. The analyst also initiated coverage of O'Reilly Automotive (ORLY) with a Buy rating and $440 price target, saying it is a well-managed business that has consistently delivered some of the strongest sales trends in the auto parts sector.
Meanwhile, McShane started both BJ’s Wholesale (BJ) and Costco (COST) with Buy ratings and $29 and $290 price targets, respectively. While she sees BJ’s offering "the best attributes within retail," or "value and a treasure hunt experience" with a management team focused on driving both top line and margin growth, she expects upside risk to consensus estimates for Costco.
ON THE SIDELINES: Not as bullish on Dick's Sporting, Goldman's McShane initiated the stock with a Neutral as she thinks "sluggish" sporting goods sales and competition from both online and vendors will mute the company's sales growth. The analyst also started coverage of Best Buy and Michael's (MIK) with Neutral ratings, saying she sees limited upside to valuation at current share levels for the former, and expects the latter to remain range-bound while the company "works to win back" its core consumers and deals with a competitive environment amidst looming tariffs.
Additionally, McShane initiated RH (RH), Floor & Decor (FND), Genuine Parts (GPC) and AutoZone (AZO) with a Neutral rating. The analyst told investors that she prefers names that are more "defensive in nature" than RH as certain housing data points have been softening, and that she sees ongoing risk that Floor & Decor's comparable sales may not reaccelerate if turnover remains under pressure or if higher prices result in less consumer demand. Regarding Genuine Parts, she views the risk/reward as balanced at current share levels, while AutoZone's valuation suggests little room for further upside as it is at historical peak.
SELL CONTAINER STORE, BED BATH & BEYOND: Bearish on Container Store (TCS), Bed Bath & Beyond and Advance Auto Parts (AAP), Goldman's McShane started all with Sell ratings. The analyst noted that Container Store has a good degree of overlap with the mass channel, which continues to expand the home offering, and some tougher compares to lap this year. Meanwhile, weak in-store trends and over-reliance on coupons as a traffic driver have led to significant pressure on sales and margins for Bed Bath & Beyond, she contended, adding that she expects the retailer will face ongoing sales declines and market share losses resulting from a high level of competition in the industry and continued challenges with its store fleet. Regarding Advance Auto Parts, the analyst pointed out that the company continues to lag peers on a number of metrics, particularly on profitability.
WHAT'S NOTABLE: Kate McShane recently joined Goldman Sachs' team from Citi, where she also covered several names in the retail sector. At Citi, the analyst had a Neutral rating for Dick's Sporting shares and a Buy rating on Walmart.
BED BATH & BEYOND RESULTS: One of the retailers McShane initiated with a Sell rating reported quarterly results after market close on Wednesday, sending its shares into negative territory and extending losses since April to about 45% as Bed Bath & Beyond pursues a restructuring plan. While the company posted better than expected first quarter earnings, the retailer cautioned full year profits would be at the lower end of previous guidance. "As I evaluate and assess the work underway, my early observations revealed that our number one priority must be a focus on stabilizing our topline and optimizing our sales opportunity," interim CEO Mary Winston said. "This will require collaboration and refinement of initiatives across multiple areas of the business, including merchandising, marketing, branding, pricing and supply chain."
PRICE ACTION: In late morning trading, shares of Target have gained almost 1% to $86.44, while Walmart's stock is fractionally up to $113.47. Meanwhile, Bed Bath & Beyond has plunged over 8% to $10.56, and Container Store has slipped about 3% to $7.23.
