Morgan Stanley Comments On Target Corporation, Office Depot Inc And Other Hardline & Discount Retailers

Morgan Stanley analyst Simeon Gutman recently visited the stores of Best Buy Co Inc BBY, Target Corporation TGT, PetSmart, Inc. PETM, Vitamin Shoppe Inc VSI and Office Depot Inc ODP.

The individual takeaways noted in Monday’s research publication are below.

Best Buy

• Accelerating Ultra 4K HD television sales (<~$2,000 units selling well, ~$8,000 units gaining traction).
• TV sales largely drove Best Buy’s Consumer Electronics comps to the first positive quarterly reading in 4 years.
• “Strengthening mobile sales along with accelerating TV sales set the stage for flat to slightly positive comps by Q4.”

Target

• Still have product “out-of-stock” though inventory position strengthened considerably since last visit.
• Problematic “out-of stock” items we temporary price-cuts signalling discount-conscious customers cherry picking sales items.
• Targets management of inventory continues to leave investor confidence in limbo.

PetSmart

• The PetSmart acquisition of Pet360 (which owns PetFoodDirect) has impacted the distribution of PetFoodDirect through other vendors
• “these actions reflect pet food vendors' desires to restrict supply and protect certain channels, in this case we assume the direct and independent retail channels.”
• Regarding the PetSmart/Petco merger “in the event a merger is allowed it highlights brand risk as 1) some vendors may pull products and 2) some vendors may look to diversify channels (possibly into Food/Drug/Mass).”

Vitamin Shoppe

• Sales of increased one percent year over year, up from the prior period reading of a 0.5 percent decrease year over year.
• New racks of Tommie Copper merchandise should increase comps over time.
• Consolidation hopes create a valuation floor in vitamin retail segment.

Office Depot

• Morgan’s new price target of $6.70 reflects the bank’s comfort in Office Depots integration efforts stemming from merger synergies.
• The company sees significant opportunity in enhancing it’s own position, consolidation is not a focus.
• We continue to like management's approach to synergy realization (having completely
• "Restructured the org chart, narrowing the focus and creating fewer direct reports)."