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Best Buy or Target: Which Retail Stock Could Deliver Higher Returns in 2021?

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TipRanks
·6 min read
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2020 was a mixed bag for the US retail sector. On one hand, brick-and-mortar retailers with exposure to categories like apparel and jewelry faced tough times earlier this year, while on the other, home goods retailers, online players, retailers selling consumer electronics and those with exposure to essential items gained from pandemic-induced demand.

With COVID-19 vaccines being rolled out rapidly, what's in store for the retail sector in 2021? We will use TipRanks' Stock Comparison tool to place two popular names in the retail space—Best Buy and Target, alongside each other and select the stock offering a more compelling investment opportunity.

Best Buy (BBY)    

Best Buy, with a network of 1,204 stores, is a pure-play consumer electronics retailer that survived challenging business conditions over the past several years, while many peers filed for bankruptcy. The company’s Renew Blue turnaround strategy and strong leadership helped it thrive amid growing competition from online retailers like Amazon. 

In November, Best Buy reported an impressive comparable sales growth of 23% for fiscal 3Q (ended Nov. 2) and attributed it to “elevated demand for products that help customers work, learn, cook, entertain and connect in their homes.” Notably, higher sales of computing, home theater and appliances categories (partially offset by lower mobile phone sales) drove a 21.4% rise in overall revenue to $11.9 billion.

Best Buy’s focus and significant investments to strengthen its online channels immensely benefited the company amid the pandemic and drove a 174% rise in domestic online comparable sales. Also, higher margins coupled with robust sales resulted in an 82% rise in 3Q adjusted EPS to $2.06. 

Despite the stellar performance in the recent quarter, Goldman Sachs analyst Kate McShane downgraded Best Buy to Sell from Hold earlier this month and cut the price target to $97 from $107.

McShane still feels that “Best Buy is one of the best run retailers in the U.S. and continues to evolve its omnichannel,” but cautioned that she sees risk in 2021 for the stock based on “1) very strong compares; not only from strong sales in 2020 but the ability to capture ~80% of sales when the stores were closed, making it a harder compare, 2) its lack of gross margin flow through in 2020, 3) valuation.”

The analyst stated that the company will likely have “a very strong comp result” for fiscal 4Q. (See BBY stock analysis on TipRanks)

Indeed, Best Buy also indicated that the demand for its products and services remained elevated at the beginning of the fiscal fourth quarter. The company’s sales in the first few weeks of November remained strong thanks to the launch of the new gaming consoles from Sony and Microsoft and also likely due to the pull forward of holiday season sales. That said, the company stated that it does not expect sales trends to remain at the levels experienced in 3Q.  

The company also thinks 4Q gross margins will be under pressure due to higher supply chain costs associated with rising online sales and a higher mix of lower-margin gaming consoles.

Currently, the Street is divided on Best Buy, with 8 Buys versus 7 Holds and 1 Sell adding up to a Moderate Buy analyst consensus. The average price target of $126.60 implies the stock could rise about 25% over the coming year. Shares have risen 15.5% year-to-date.   

Target Corporation (TGT)

Big-box retailer Target sells an extensive merchandise assortment that ranges from food, beverages and other essentials to consumer electronics and apparel. The company’s exposure to food and essentials worked in its favor as the category experienced robust pandemic-led demand this year due to stay-at-home mandates.

Strong footfall at stores and remarkable online sales led to a 21.3% rise in Target’s fiscal 3Q revenue to $22.6 billion. Adjusted EPS surged 105% year-over-year to $2.79, driven by impressive top-line growth and enhanced margins that gained from lower markdowns.

Even prior to the pandemic, Target was strengthening its digital channels to address the demand for online purchases. The company’s multi-year efforts helped in driving higher digital sales amid the current health crisis as many customers preferred online shopping over in-store purchases. In 3Q, Target’s digital sales jumped 155%, supported by same-day delivery fulfillment options like Same-Day Delivery with Shipt, Order Pickup and Drive Up.

Recently, Argus Research analyst Chris Graja upgraded Target to Buy from Hold with a price target of $205. Graja called the company’s comparable transactions growth of 4.5% “an astoundingly good number on both an absolute and relative basis that speaks to Target's growing relevance and market share gains amid the COVID pandemic, where cautious shoppers are making fewer trips to the store.”

The analyst raised his earnings estimates for Target and stated, “We believe that increasing engagement with shoppers at a time when technology and shopping behavior are changing rapidly could be a good indicator of future customer loyalty.”

Looking forward, Target continues to enhance the consumer shopping experience at stores and online by adding attractive merchandise and offering convenient delivery options. It recently partnered with FAO Schwarz to offer an extensive toy collection and also teamed up with Ulta Beauty to open 100 in-store beauty shops next year. (See TGT stock analysis on TipRanks)

The company continues to expand its store base and opened 30 new stores this year, of which, 29 were of smaller format. As of October end, Target operated about 1,900 stores.

Target’s strong performance led to a 35.6% rise in its shares in 2020 and the average price target of $193.12 reflects further upside potential of 11.1% from current levels. Overall, the stock scores a cautiously optimistic Moderate Buy analyst consensus backed by 13 Buys and 5 Holds.    

Conclusion

Target and Best Buy have adapted themselves to evolving consumer needs and are poised for long-term growth with their impressive omnichannel capabilities. Growth rates could moderate in 2021 compared to this year as the pandemic abates. That said, Best Buy looks to be a better pick currently as the Street sees higher upside potential in the months ahead.  

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment