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Goldman Sachs: 3 Big Box Retailers Primed for Gains

We hear so much about online retail that it’s easy to lose sight of some important facts: brick-and-mortar stores aren’t going to disappear completely. Customers still like to walk inside, pick up the floor model, or watch a real-life demonstration. While online retail offers convenience, brick-and-mortar offers experience.

In 2018, physical retailers brought in $714 billion in sales, a 3.2% increase from 2017, compared to $679 billion in annual online retailer sales. Online’s faster growth rate, 9.6% from 2017, shows that it will soon take the lead, but brick-and-mortar’s sheer size makes a strong case for permanence.

Three major big-box style retailers have recently gotten the thumbs-up from Goldman Sachs. Let’s unpack the TipRanks data , and find out why.

Costco Corporation ( COST )

Costco has taken the club-model big-box warehouse store to its greatest success. The retailer has over 100 million members, with a 90% resubscription rate. While club membership is required to shop, Costco has benefits from high levels of repeat visits and bulk purchases; its membership shops frequently and buys a lot. The warehouse-floor layout of the stores helps keep down overhead and stocking costs, while offering high volume keeps prices down for customers.

This successful model, in a colorful comparison by five-star financial blogger Luke Lango , has created an “offline version of Amazon ( AMZN )… [The] loyal membership base will continue to power healthy results for the retailer for the foreseeable future…” Those results have pushed COST shares well above their average price target, prompting top analysts to reevaluate the stock in the past week.

Goldman’s five-star analyst Kate McShane initiated her coverage on COST on July 11 with a buy rating and price target of $290, saying, “The club model continues to have some of the best attributes within retail.” Her target suggests a 3.36% upside to the stock’s current price; at the time she set it, the upside was almost 5%.

COST has been on an upward surge as the analysts have been raising their price target on the stock. To give two examples, Loop Capital’s Laura Champine bumped her target to $300 “after [COST’s] June comps data and the encouraging sequential improvement in traffic growth in May…” while Baird’s Peter Benedict set a $290 target, saying, “[COST] is a growth staple as management continues to boost its competitive position.”

Costco’s analyst consensus rating is a moderate buy, based on 9 buys and 5 holds assigned in the last three months. As mentioned above, the stock’s share price has powered through the average price target in recent trading sessions. Market analysts have begun setting new targets in the $290 to $300 range, but the average remains at $269. A $290 target will give the stock a 3.36% upside.

Target Corporation ( TGT )

Goldman gives its best rating to Target, adding the stock to its Americas Conviction buy list. Target has been posting excellent comp sales growth in recent quarters, along with fast growth of the store’s online segment. Looking forward, Target’s upfront costs on store improvements and online initiatives will start to drop in the next few quarters, giving the company an additional boost to the bottom line.

This is the background that sparked McShane ’s interest in the stock, getting her to start coverage with a $102 price target. In her research note, she says, “Target is starting to benefit meaningfully from door closures, and an inflection in operating income growth should drive accelerating earnings growth.” Her price target suggests an upside of 17.5%.

McShane is not the only analyst taking a favorable view of Target. After the Q1 earnings, JPMorgan’s Christopher Horvers set a $100 price target and buy rating on the stock, saying, “Target’s 4.8% comps is one of the best so far in large cap retail’s first-quarter.” Horver’s target implies a 15% upside potential for TGT.

Target maintains a moderate buy from the analyst consensus, based on 6 buys and 7 holds. Shares are selling for $86.80, so the average price target of $89.18 indicates a modest 2.74% upside potential.

Walmart, Inc. ( WMT )

Sam Walton’s retail giant has been having a good year. WMT stock is up 23% year-to-date, a solid performance built on a foundation similar to Target’s. Walmart has been streamlining in-store operations, improving reshelving and stocking times along with face-to-face customer service. The store improvements have gone hand-in-hand with an e-commerce initiative. In a creative twist, Walmart leveraged its existing network of stores to cut delivery costs from the online end – customers can purchase online, and pick-up at the store. It’s a viable and convenient option, given that almost everyone in America lives within 10 miles of a Walmart location.

The company’s self-reinvention prompted McShane to note WMT’s improved same-store comp sales and traffic growth. As with Target, she also noted that the company faced front-loaded expenses when implementing the changes, but as those expenses moderate profits will improve. She believes WMT stock will continue its upward trend, and sets a $123 price target as she initiates coverage. Her target shows confidence in a 7% upside.

Walmart has been attracting positive analyst attention for the past month and more. On June 24, KeyBanc’s Edward Yruma noted Walmart’s acquisition of the PhonePe P2P money transfer app, and specifically pointed out a potential $14 billion valuation in the medium term. He raised his price target by 4%, to $125, and reiterated his “continued confidence in WMT’s ability to innovate.” His price target indicates an upside of 8.7%.

Overall, WMT gets another moderate buy from the analyst consensus, based on 9 buys, 2 holds, and 1 sell rating. The stock’s average price target of $115.33 gives a mere 0.3% upside to the current price of $114.98, but with analysts improving their ratings and raising targets, that upside may increase in coming weeks.

The retailers detailed here fall into two patterns for success: the warehouse membership model, and the traditional retail model with improvements. Both are viable paths to corporate success and returns for investors.

Visit TipRanks’ Top Analysts page , to learn more about Wall Street’s best market watchers.