Morgan Stanley Hikes Wal-Mart Price Target, Downgrades These Three 'Disappointing' Retailers

• Shares of Wal-Mart Stores, Inc. WMT, Party City Holdco Inc PRTY, Sally Beauty Holdings, Inc. SBH and Best Buy Co Inc BBY have been falling since January 2015.
• Morgan Stanley’s Simeon Gutman downgraded the ratings on Party City, Sally Beauty and Best Buy from Overweight to Equal-weight, while reducing the price target on Wal-Mart Stores.
• Growing popularity of low margin online purchases and omni channel investments are expected to keep industry margins under pressure in 2016, Gutman believes.

Analyst Simeon Gutman mentioned that while consumer spending remains healthy, it is not accelerating with clicks continuing to take share from bricks. Increased savings by consumers and their growing preference to make big ticket housing and auto purchases, besides investing in healthcare and services, leaves little for the Hardline/Broadline categories, Gutman noted.
“We predict underwhelming 1.5% Hardline/Broadline category growth vs. 2.3% PCE growth in 2016. This assumes minimal incremental spending dollars available for our companies and is not enough to drive meaningful operating leverage,” the Morgan Stanley report mentioned.
Lower margin sales via online and omni-channel investments are expected to keep industry margins under pressure in 2016. “On average, Hardline/Broadline retailers have seen over 100 bps of EBIT margin contraction in the last two years and we conservatively expect another 30-50 bps next year,” the report added.

Wal-Mart Stores

The analyst maintained an Equal-weight rating on Wal-Mart Stores, while raising its price target from $60 to $65. Analyst Simeon Gutman believes that the company could relatively outperform its peers given its achievable estimates and low expectations.

Disappointing comps at Party City Holdco, Sally Beauty Holdings and Best Buy have prevented the stocks of these companies to appreciate. “While we see limited downside for these names, a lack of catalysts and high leverage (for PRTY) moves us to the sidelines,” Gutman stated.

Party City Holdco

Gutman reduced the price target on Party City Holdco from $20 to $12. The analyst believes that the company’s next year EBITDA estimate of $390 million is achievable but its 2016 comps expectations may not be fulfilled, given a less favorable Halloween calendar.
Party City Holdco’s guidance implies a 4Q comp of 1-2.5 percent on top of 7.5 percent growth last year, while still lapping Frozen in a difficult retail environment. “While PRTY is not as reliant on comps to deliver earnings growth as other retailers, because of its vertical model, at the end of the day it is still a retailer and the market will likely judge PRTY on its ability to deliver on comps,” the Morgan Stanley report mentioned.

Sally Beauty Holdings

Gutman reduced the price target on the company from $34 to $30. The analyst believes that Sally Beauty Holdings’ current stock valuation reflects the catalysts expected in 2016.
The company’s core hair color customers are expected to drive low single digit comps with store and marketing enhancements likely to boost them further, Gutman mentioned.

Best Buy

Gutman reduced the target price on Best Buy from $37 to $28. The analyst believes that although there is not much downside risk, there are no catalysts either. The lack of product drivers in 2016 and beyond is likely to keep the stock valuation low.
Best Buy’s future comps are expected to be negatively hit by the downside in the TV cycle and ASP compression, Gutman noted, adding that other categories were not strong enough to meaningfully boost the company’s overall comps.
“Any further investment spending should be offset with cost reduction efforts and additional savings; thus, operating margins should be relatively well protected (assuming no further sales deleverage),” the Morgan Stanley report stated.