Disney (DIS +2.30%) and Target (TGT +3.11%) had opposite experiences as the coronavirus outbreak spread throughout the U.S. Disney, the owner of the world's most visited theme park, saw revenue plunge as it temporarily closed parks. At the same time, sales at Target soared as consumers rushed to buy essentials online.
Today, shares of both companies are trading near all-time highs -- but while Target has recouped losses from the March market crash, Disney shares haven't yet made it that far, and are still down for the year. So should we buy Disney now before it cruises into positive territory, or should we invest in Target's revenue momentum? Let's have a look at the prospects of each company.
Image source: Disney.
Disney
Disney reopened the Magic Kingdom and its other Orlando parks in July despite a spike in coronavirus cases in Florida at the time. The company's parks had been closed for four months, and those closures had already wreaked havoc on quarterly earnings. Disney reported a 93% drop in earnings per share in the fiscal second quarter, and swung to a loss in the following quarter. Disney has four business segments, but parks, experiences, and products generally contributes the most to revenue.
The bright spot for Disney during the outbreak was the progress of its streaming service, Disney+. The company initially expected global paid subscriptions to total at least 60 million by the end of fiscal 2024. Instead, Disney+ reached more than 60.5 million subscribers last month -- and the service only launched in November. Stay-at-home orders and lockdowns around the world surely gave Disney+ a boost. People had more time to watch movies and were looking for ways to entertain their children. While subscriptions may not climb at the same rate in the coming years, Disney+ is definitely off to a strong start. And if programming doesn't disappoint, the streaming service could become an important growth driver in the future.
It's clear that Disney isn't at its most magical right now. But with parks reopened, it's logical to imagine the worst is behind us. The strength of Disney's brand and the attachment many children and adults have to the parks make me optimistic that the company and shares will not only rebound, but grow to new heights. That said, with park attendance limited due to social distancing measures, recovery will be slow.
Target
Target's biggest problem during the early days of the coronavirus outbreak was the fact that shoppers were buying more low-margin items like essentials than higher-margin clothing and accessories. At the same time, the online platform was gaining steam, with a 141% digital sales increase in the first quarter. This could have been a one-quarter event during a highly unusual time. But in the second quarter, Target proved that online growth -- and overall growth -- is here to stay.
In the second quarter, comparable sales rose more than 24% -- the most ever. In-store sales increased nearly 11%, while digital sales surged 195%. Target also said it gained $5 billion in market share in the first half of the year, and the gains came across all five of its main product categories. And remember that early trend of weak sales for higher-margin items? Well, clothing went from a 20% drop in sales in the first quarter to a double-digit increase in the second quarter. Target also reported an 85.7% gain in earnings per share to $3.38 for the quarter. The company has surpassed analysts' average earnings forecast for the past four quarters.
Target isn't new to the online game. For example, the chain has offered order pickup in stores for the past five years. And that's probably why it performed so well. The company already had most of the elements in place, so it was able to quickly ramp up to meet needs during the height of the health crisis. While digital sales growth may not climb at the same pace indefinitely, it is likely to remain strong due to Target's amazing management of the crisis and the relationship it's built with customers.
So will it be Disney magic or Target's digital prowess?
I expect both stocks to climb in the near term. Disney shares have already gained on optimism about a recovery. That is likely to continue as Disney announces progress in a return to normal operations. For long-term sustainable share gains, the question is: Will the park return to the guest volume and therefore profitability of pre-COVID days? We can't expect that until the coronavirus crisis is over -- and right now, the duration of the outbreak is unclear. And the revenue growth of Disney's direct-to-consumer business isn't yet translating into profit. The segment is losing money due to the costs associated with the launch of Disney+. The company has said it expects profitability for Disney+ by fiscal 2024. Eventually, parks and direct-to-consumer will drive growth, another reason I'm confident about Disney's future.
As for Target, optimism about revenue and earnings growth should push that stock higher now and into the future. Target's progress so far in digital and in-store sales, and profit puts it on the right path.
So, when it comes to investing right now, I'll choose Target. Why? I like the reason why the shares are gaining right now: Target is already reporting solid earnings and growth. For Disney, we'll have to be patient.
