As U.S. consumers shift their spending habits and budgets to prioritize non-discretionary categories, Bank of America analyst Elizabeth Suzuki upgraded one retailer to Buy and downgraded another to Neutral. The analyst expects consumables such as pet and animal feed and home and vehicle maintenance essentials to earn a higher share of wallet among rural consumers, which bodes well for rural lifestyle retailer Tractor Supply (TSCO). On the flip side, she sees increasing uncertainty around 2023 earnings making Best Buy’s (BBY) valuation look incrementally less attractive.
BUY TRACTOR SUPPLY: Bank of America analyst Elizabeth Suzuki upgraded Tractor Supply to Buy from Neutral with a price target of $260, up from $250. Tractor Supply continues to beat expectations and she expects consumables, like pet and animal feed and home and vehicle maintenance essentials, to earn a higher share of wallet as U.S. consumers shift their spending toward non-discretionary categories over discretionary products.
Underscoring the relative strength of needs-based retailers, Tractor Supply pre-announced second quarter earnings last week that appear to be tracking ahead of prior expectations, the analyst noted. Overall, Suzuki believes Tractor Supply’s product mix — which is primarily non-discretionary products such as livestock and pet supplies, hardware/tools/truck supplies, and workwear — makes the retailer less vulnerable to the pullback in spending that many retailers have exhibited in recent months.
MOVING TO THE SIDELINES: Meanwhile, the analyst downgraded Best Buy to Neutral from Buy with a price target of $90, down from $110, stating that she sees increasing risk to Best Buy's fiscal 2024 earnings outlook as U.S. consumers pull back on discretionary spending. On her lowered fiscal 2024 of $10.08, the stock currently trades at a price to earnings of about 7-times. However, if consumer spending behavior continues to “favor needs over wants” and Best Buy’s earnings revert to pre-COVID levels, its price to earnings would be around 9-times, consistent with low-growth brick and mortar retailers and her valuation basis for a $90 price target.
She further argued that a discount to Best Buy's long-term average multiple is warranted in light of the pressure on consumer discretionary spending given ongoing inflation. Although the company expects a modest year-over-year decline in sales from $51.8B in fiscal 2022 to $49.3B-$50.8B in fiscal year 2023, the analyst thinks the downside risk could be a full reversion to the prior trend line. In other words, if Best Buy’s sales had continued at the company’s pre-COVID 5-year average growth pace of 1.6%, fiscal 2025 sales would be on track to reach only about $47B, about $8B below the midpoint of Best Buy’s fiscal 2025 guidance range.
PRICE ACTION: In morning trading, shares of Tractor Supply have gained about 2% to $195.62, while Best Buy’s stock has advanced about 1.5% to $70.50.
