Goldman On Hardline Retail: Top Ideas, New Ideas, Out Of Consensus Ideas, And More

Seven key themes will dominate the retail sector investment landscape next year, and investors have plenty of choices, according to Goldman Sachs analyst Kate McShane.

Seven Themes: The seven themes that will impact the hardline retail space next year are as follows, McShane said in a Thursday note.

1. The macro environment is supportive of discretionary stocks.

2. A shift in consumer spending will be seen in 2021, although the complete end of "at-home trends" could take all year.

3. Some retailers will benefit from easier year-over-year comparisons.

4. Weaker retailers will continue shutting doors, and consumers will merely transition toward "healthier" ones. 

5. Margins should improve from easing COVID-19 costs, although wages could prove to be an offset.

6. Cash balances for many companies heading into 2021 are at all-time highs. The higher level of capital can be used for investments in the business and/or share buybacks that would drive earnings growth even with negative comps.

7. Many retail stocks are still trading at a larger valuation discount over prior years.

Goldman's Best Small, Mid-Cap Stocks: Goldman's top pick in the small- and mid-cap space is BJs Wholesale Club Holdings Inc BJ.

During the pandemic, the wholesaler has signed 630,000 net new members year-over-year versus 200,000 to 250,000 on average, McShane said.  

The company took advantage of its membership influx by paying off debt and accelerating its unit growth plants, the analyst said. 

Goldman Sachs maintains a Conviction List Buy rating on BJs stock with a $54 price target.

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Goldman's Out Of Consensus Stock Pick: The majority of sell-side analysts rate Dicks Sporting Goods Inc DKS with a Neutral rating, but the buy-side sentiment is more negative, the analyst said. 

Goldman disagrees and maintains the sporting goods chain with a Buy rating and $74 price target.

The company should be able to grow comps in 2021 on top of "unprecedented comp strength" in 2020, she said. 

The bullish outlook is based on expectations for continued athletic trends; the sustainability of categories that consumers grew to love during the pandemic like golf; improved in-store merchandise; and a strong relationship Nike Inc NKE, McShane said. 

Goldman's Out Of Consensus Stock To Sell: Goldman Sachs' new Sell rating on Electronics store Best Buy Co Inc BBY is the lone bearish stance, as 11 research firms rate the stock at Hold and 12 at Buy.

The research firm downgraded Best Buy from Neutral to Sell with a price target lowered from $107 to $97.

The company remains "one of the best-run retailers" in the U.S., but two headwinds warrant a shift toward a bearish stance, the analyst said.

They are: very difficult compares, as the company captured around 80% of sales when the stores were closed the lack of gross margin flow-through in 2020, she said. 

Goldman's New Sell Idea: Goldman Sachs downgraded Sprouts Farmers Market Inc's SFM from Neutral to Sell with a price target lowered from $23 to $18.

The food-at-home trend will likely not only be "less favorable" in 2021, but grocers will need to become incrementally promotional, McShane said. 

Goldman's Conviction List Stocks To Buy: The research firm also recommends the following stocks:

O'Reilly Automotive Inc ORLY, $545 price target.

Target Corporation TGT, $212 price target.

Buy Recommendations: The following stocks are Buy-rated:

Costco Wholesale Corporation COST, $376 price target.

Home Depot Inc HD, $313 price target.

Lowe`s Companies Inc LOW, $165 price target.

National Vision Holdings Inc EYE, $48 price target.

Walmart Inc WMT, $164 price target.

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