Earnings season is just kicking off, and as always, investors will want to keep a close eye on their top holdings over the coming weeks.
While plenty of macro-level events are sure to move stocks, including the presidential election, negotiations over a second stimulus package, and developments in the coronavirus pandemic, for individual stocks there's no more important news than the quarterly earnings report.
Streaming is supreme
As much any other technology during the pandemic, video streaming has seen a dramatic acceleration in adoption. Traditional Pay-TV bundles are shedding subscribers in favor of over-the-top options, and 2020 has seen something of a gold rush toward streaming as Comcast has launched Peacock, AT&T released HBO Max, and Walt Disney has restructured its business to make Disney+ a bigger priority. This year may be remembered as a tipping point in the global shift from traditional pay TV, and no company is better positioned to benefit from that movement than Netflix.
The leading streamer now has nearly as many U.S. households paying for its service as those that pay for cable or satellite TV, and its advantages abroad, where two-thirds of its subscribers come from, are even clearer, with local-language programming in countries from Turkey to Brazil to South Korea.
Netflix tamped down expectations for growth in the second half of the year, calling for just 2.5 million subscriber additions. It assumed that many of those new members had been pulled forward into the first half of the year, when it added nearly 26 million new members, close to its total for all of last year.
However, the pandemic has continue to rage in much of the world, including Latin America, one of its biggest markets, and cases have rebounded in much of Europe, prompting localized lockdowns. That means that consumers are still looking for convenient at-home entertainment options.
Elsewhere, Netflix is showing signs of confidence. It recently said it would raise prices in Canada for the first time in two years, likely a reflection of solid growth in that market. And it's also eliminated free trials in the U.S., which could be part of a crackdown against account abuses, though Netflix also launched a free site with a sampling of its original programming. Neither of those moves sounds like a company afraid that subscriber growth is suddenly grinding to the halt.
In addition to the low bar in subscriber-growth expectations for the quarter, Netflix could also deliver a strong performance on the bottom line when it reports on Oct. 20, as the pandemic has cut into content spending, fattening profits. Better-than-expected subscriber additions and a robust bottom-line result could lead to a serious post-earnings pop.
The last retailer standing
It's no secret that the retail industry has been crushed by the coronavirus pandemic, but essential retailers have seized the opportunity. Not only have they seen a surge in demand from consumers stocking up on food and cleaning supplies, but they're also taking share from discretionary retailers like department stores and mall-based chains, and no one is doing a better job of that than Target.
The big-box chain has a unique position in the industry. It sells a broad range of products like Walmart and Costco do, but its "cheap chic" image helps distinguish its product selection and appeals to a higher-income demographic.
Target has capitalized on the fallout in the industry in a big way. Comparable-store sales in the second quarter hit a record, rising 24.3%, and earnings per share nearly doubled. While e-commerce orders surged in the quarter with digital comps nearly tripling, in-store comps also rose 10%, showing that customers are still flocking to stores. It also grabbed $5 billion in market share in the first half of the year.
That trend looks set to continue into the third quarter as Target said comps were in the low double digits for the three weeks of August. And data from Placer.ai shows that foot traffic at Target stores has actually been positive for the last seven weeks (most of the third quarter) even while it has plunged at most retailers, including those like Walmart and The TJX Companies' T.J. Maxx chain that have held up relatively well during the pandemic.
The pressure on its competitors is leading to advantages with both customers and suppliers. In fact, even as apparel retail was down sharply overall in the second quarter, Target saw a double-digit increase in the category as consumers look to consolidate shopping trips and stock up on Target's popular private-label brands.
It's also getting increased attention from brands like Levi Strauss, which plans to expand the number of Target stores it sells in from 140 to 500, according to The Wall Street Journal, and recently began selling its primary line of jeans at Target store in addition to its budget-priced Denizen line. Steve Madden also signaled it would look to Target for growth over the coming year.
It only makes sense that Target would attract more brand partnerships since it's proved it can deliver foot traffic, which is what brands crave most, even during difficult circumstances like the pandemic. And that could lead to big rewards for investors when it delivers third-quarter earnings Nov. 18. Analysts are expecting revenue to increase 10.8% to $20.68 billion, but only see earnings per share creeping up from $1.36 to $1.52. Considering the strong sales in August and the growth in foot traffic in recent weeks, Target could easily top those forecasts, especially on the bottom line.