Goldman names its favorite retail stock and others it likes in 2024

Published Wed, Dec 13 20236:50 AM EST

Target is Goldman Sachs' "best long idea" in the retail space for 2024, as the firm expects a deflationary environment to improve discretionary sales. According to analysts led by Kate McShane, several catalysts can boost Target in the next 12 months: Goldman's constructive outlook on the health of the consumer based on continued labor market strength, which could normalize the demand for services and goods. The firm's view that fiscal 2024 could be a "year of sales inflection" for several retailers, including Target. A more favorable sales backdrop, with a lean inventory environment, improved supply chain and advancements in tech that could drive promotion personalization to drive margin growth. A more attractive valuation setup compared to last year for Target. The big-box retailer's shares have struggled this year, down nearly 9% in 2023. Although Target recently beat third-quarter earnings estimates, its comparable sales showed a decline for the second straight quarter. Compared to its rivals, Target is known more for its clothing, beauty and home goods. It's still trying to boost the quality of its grocery offerings. Goldman, however, is bullish on the stock's future, seeing nearly 30% upside from Tuesday's close. "We see long-term growth for TGT tied to 1) market share gains across categories from various mall-based retailers on strong merchandising and 2) a recovery to 6%+ operating margins over the long term, supported by a normalization of mix, markdowns, freight/transportation costs, and shrink, along with scale and efficiency gains," McShane wrote in the Tuesday note. TGT YTD mountain Target stock. McShane noted that Target has underperformed other retailers in fiscal 2023, as its higher mix of discretionary items has led to a "notable comp drag." This issue should resolve next year, however. "The cost to feed the family, fuel the car and heat the home should once again grow at a relatively modest rate given our inflation forecast for food and healthcare, along with the futures curves for energy," McShane said. That means households will have more money left over for saving and spending, she added. Other retail stocks that have caught Goldman's attention include Ollie's Bargain Outlet, which the firm calls a "best small/mid cap idea" in 2024. McShane's team pointed to Ollie's growing scale, as well as the retailer's attractive pricing. "We note that OLLI's bargain prices (10% -70% below traditional retailers) should continue to resonate with customers given current macro headwinds, while trade-down trends also remain a tailwind," said Goldman, which rates the stock a buy and sees about 25% upside from Tuesday's close. Other buy-rated ideas that Goldman likes include Home Depot , O'Reilly Automotive and Dollar General . — CNBC's Michael Bloom contributed reporting.