3 Reasons Target Is A Better Investment Than Best Buy, According To Morgan Stanley

Best Buy Co Inc (NYSE: BBY) and Target Corporation (NYSE: TGT) are both retailers fighting to survive in the face of Amazon.com, Inc. (NASDAQ: AMZN), but despite both managing to stay relevant, Morgan Stanley sees diverging futures ahead.

Morgan Stanley analyst Brandon Fletcher has an Outperform rating and $80 price target on Target. The analyst has an Underperform rating and $59 price target on Best Buy.

Here are three reasosn Fletcher gave for his bullish stance on Target and bearish stance on Best Buy. 

Lower Service Levels Make Target More Flexible

Best Buy differentiates itself from the competition with the high level of service it provides customers, Fletcher said. To do this, the company must retain a highly trained and well-compensated staff.

Target staff do little more than stock merchandise and check out customers, the analyst said. Target’s differentiation stems from its large number of private label brands and exclusives.

What this means is that when sales slump, Target can easily cut back its labor costs proportionally, whereas Best Buy cannot easily do the same, the analyst said. 

Best Buy Is A ‘Private Label Failure’

“For us, private label victory is when a customer thinks the retailer solved the problem better than a brand. Private label failure is when a retailer needs the margin to mix out losses on brands,” Fletcher said. 

Private labels benefit companies by boosting gross margins. A strong private label can also drive traffic to the store. This is where Target thrives, with a broad array of products across categories.

The few items Best Buy has in stock do not warrant a trip to its stores over a competitor’s, Fletcher said. Furthermore, the margins gained from private label sales are cannibalized by the pressure created by Best Buy’s price match guarantee on branded items, he said. 

At The End Of The Day, Target’s Husk Is Worth More

Should the worst come to pass and both businesses fail, Target’s assets are simply worth more, according to Morgan Stanley. The company owns quite a bit of real estate, typically in strong commercial locations. Best Buy primarily leases its locations. Target’s distribution network is also sufficiently large to potentially be worth repurposing for a buyer, Fletcher said. 

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