Morgan Stanley Upgrades Sally Beauty And Williams-Sonoma, Downgrades 4 Others

Morgan Stanley analysts revisited the entire Hardline, Broadline, and Food retail category with two upgrades and four downgrades.

The Retail Analyst: Simeon Gutman upgraded:

Sally Beauty Holdings, Inc. SBH from Underweight to Equal-Weight, price target lifted from $9 to $13.
Williams-Sonoma, Inc. WSM from Underweight to Equal-Weight, price target lifted from $95 to $130.

The Sally Beauty Thesis: Sally Beauty operates in a defensive business category that should see growth in 2021, Gutman wrote in the note. The stock also notably underperformed the retail sector in 2020 as it fell 30% versus a 33% market-cap-weighted gain for the retail group.

Investors are likely to look at Sally Beauty as both a "reopening winner" and "value" stock amid an improving economic environment.

The Williams-Sonoma Thesis: The case against a bearish stance on Williams-Sonoma's stock is based on: 1) expectations for the home furnishing category to grow at a "healthy" rate in 2021 and beyond, and 2) the Street's models for Williams-Sonoma's 2021 performance are "not overly demanding."

The company could show stronger-than-expected revenue growth in the near term and generate 10% EBIT margins over the next few years versus 8% to 9% in 2017 to 2019 and 13.5% in 2020.

Gutman downgraded:

Michaels Companies Inc MIK from Equal-Weight to Underweight, unchanged $13 price target.
Ollie's Bargain Outlet Holdings Inc OLLI from Equal-Weight to Underweight, price target lowered from $86 to $80.
Kroger Co KR from Equal-Weight to Underweight, price target lowered from $32 to $28.
Albertsons Companies Inc ACI from Equal-Weight to Underweight, price target lowered from $16 to $13.

The Michaels Companies Thesis: Shares of crafts retailer Michaels are up 35% since Morgan Stanley last upgraded the stock in December 2020. The strong outperformance versus the S&P 500's 3% gain over the same period factors in greater upside to earnings expectations in the near-term and medium-term.

In addition, Michaels' may have positioned itself to benefit from stay-at-home trends during the COVID-19 pandemic, the analyst wrote. But its long-term outlook not materially improved while its stock is trading near its three-year and five-year historical averages versus most peer retailers that are trading at a discount.

Related Link: Benzinga's Top Ratings Upgrades, Downgrades For January 20, 2021

The Ollie's Bargain Thesis: Ollie's stock entered 2021 just 12% removed from its all-time highs but the discount retailer will face difficult year-over-year comparisons throughout 2021, Gutman wrote.

The company benefited throughout 2020 by default of being one of the few largely non-essential retailers that stayed open during the pandemic and this catalyst will not persist in 2021.

The Kroger And Albertsons Thesis: The case against Kroger and Albertsons is based on expectations for industry-wide grocery sales to decline in 2021 and experience "tepid" growth in 2022, Gutman wrote.

Both Kroger and Albertsons saw their market share gains narrow through 2020 and this implies the initial surge in demand from the pandemic is not sustainable, the analyst wrote. In fact, both companies will revert back to pre-COVID pandemic margins by 2022

 (Photo: Williams-Sonoma)