Bernstein On Broadline, Hardline Retail: Target, Dollar General Favored

Bernstein initiated coverage of broadline and hardline retailers, and favors Target Corporation TGT and Dollar General Corp. DG amid ongoing disruption from online retailers.

“Retail investing may need a stock picking mentality; returns from sector positioning alone are not likely to work as well as in the past,” analyst Brandon Fletcher wrote in a note.

Analyst Commentary On Sector

In this tough competitive backdrop, Fletcher believes the survival of a retailer depends on strategic positioning, scale, and management quality. Externally, consumer trends, location in the business cycle, and competitive structure holds key for the success.

The analyst noted that large scale retailers will gain share and usually do better than their tiny counterparts.

“When we review all these factors, we see only a handful of retailers making a long multi-decade journey and many, many more will die,” Fletcher continued.

Fletcher believes the mass segment will survive at the price of declining ROIC to defend sales, while the home channel is expected to thrive from millennials despite risks from business cycle.

Further, the analyst said the wholesale channel has a highly defensible price position, while the bargain channel will benefit from an increase in middle class shift to dollar stores. Lots of there bargain channels could be nice acquisition targets for Amazon.com, Inc.AMZN.

“Plenty of rural and semi-urban customers still need a dollar store. A nearly national footprint and logistic fit would let AMZN solve final mile,” Fletcher highlighted.

Meanwhile, Fletcher noted that the category specialists are seriously at risk as “pie of products where customers will pay for in-store product advice is shrinking.”

Ratings, Price Targets

Following are the ratings and price targets of Bernstein on the companies operating in various retail segments:

Mass Sector:

• Wal-Mart Stores Inc WMT: Market Perform, PT $75.
• Target: Outperform, PT $77.

• Home Depot Inc HD: Market Perform, PT $141.
• Lowe's Companies, Inc. LOW: Underperform, PT $66.

Wholesale:

• Costco Wholesale Corporation COST: Market Perform, PT $170.

Bargain:

• Dollar General: Outperform, PT $91.
• Dollar Tree, Inc. DLTR: Underperform, PT $63.

Specialty Category:

• Best Buy Co Inc BBY: Underperform, PT $34.