Consumers all over the world are buyings gifts and spreading holiday cheer -- but what really matters is where those dollars are being spent. Amid a throng of companies set to benefit from holiday spending, we've found two in particular that may get a bigger boost than the market's expecting.
Image source: Getty Images.
Target
Famous retail chain Target (TGT -0.57%)looks poised for an exciting holiday season. Back in 2014, then-new CEO Brian Cornell made selling more goods both online and in retail stores his top priorities. Prior to the pandemic, Target invested tons of capital in store remodels and building out the infrastructure for various online initiatives. By 2018, Target was already delivering more than $5 billion in annual digital sales.
Needless to say, these early "omnichannel" initiatives proved to be a real advantage heading into the pandemic. As more and more customers shifted to online ordering, Target remained able to meet their needs. In the third quarter, the percentage of total sales that originated online jumped from 7.5% to 15.7%, and same day fulfillment services grew 217%. While, Target's performance amid the pandemic was not entirely unique, they seem to be taking advantage of their strong momentum. In late 2019, Target announced its partnership with Disney which has resulted in multiple store-in-store locations to help drive customers Target's way. To add to Target's partnership initiatives, it recently announced a similar strategic partnership with Ulta Beauty (NASDAQ: ULTA), which should help boost Target's revenue in 2021 and beyond.
Beyond serving customers' needs, Target is benefiting shareholders as well. Thanks to its early infrastructure investments and available omnichannel solutions, customers have a plethora of ways to shop, and that's reflected in the company's financials. Target's revenue over the last 12 months has grown 14% to $88.6 billion, and was capped off by 20.7% comp store sales growth in the most recent quarter.
To supplement its strong operational performance, Target is also returning capital to shareholders at an impressive rate. Target paid $340 million in dividends in the third quarter and announced that it will resume its share repurchasing program despite previously stopping it. Target also retired $1.8 billion in long-term debt prior to the maturity of that debt and got rid of its available credit facility, strengthening its balance sheet and demonstrating its strong ability to generate cash flow.
Through tremendous operational performance and a strong capital position, Target should remain a shareholder-friendly company throughout the holiday season.
Nintendo
For the last two to three years, the Nintendo Switch has been the best selling gaming console globally, amounting to more than 68 million units sold. However, within the last month Sony and Microsoft have both launched their own new consoles for the Play Station and Xbox platforms. Yet amid the increased competition, demand for Nintendo's products is as high as ever.
According to Google Trends data, interest for the Nintendo Switch is nearing all-time highs once again, despite the presence of the other consoles. For anyone unfamiliar, the Nintendo Switch combines a traditional console system with a handheld or mobile version in the same device. Despite having less computing power than the PS5 or Xbox Series X, retailers are having trouble stocking enough Switches to meet customer demand. While there isn't one clear factor responsible for this ever growing demand, it can likely be attributed to Nintendo's exclusive content. Whether it's the Zelda series or Super Mario World 3D, there's only one platform where users can find those games -- and it's not Play Station or Xbox.
While hardware sales obviously bode well for Nintendo, its margin profile is changing thanks to the shift in product mix. Game sales are beginning to compose most of Nintendo's revenue, as opposed to one-time console sales. Games are more recurring in nature and more profitable on a per-unit basis than the hardware sales. We can see that playing out in the financials. During the last 12 months, Nintendo's revenue has increased 30% to $15.5 billion, with a 25% net margin on those sales. In the year prior, its net margin was only 15%.
Now that the majority of Nintendo customers already have a console, their incremental dollars are spent on games. However, even within game sales Nintendo is becoming more profitable as well. Games are naturally higher-margin to begin with, but the pandemic has shifted purchases of physical games to digital instead. Digital downloads carry no manufacturing or distribution costs, which makes each digital unit more profitable than a physical one. In the first six months of fiscal year 2020, 36% of Nintendo's game sales were digital. In the same period of fiscal 2021, that number jumped to 47%.
Despite growing sales, expanding profit margins, and more than $13 billion in cash and short term investments, Nintendo looks pretty cheap trading at 13 times its trailing-12-month net earnings. This multiple is lower than any previous point between 2016 and 2019, even though Nintendo's business model is more profitable than any other point in that same timeframe.
The data and numbers show that customers are flocking to both Target's stores and Nintendo's products even with the pandemic keeping customers home. As the holiday season comes and goes, pay close attention to Target's comparable store sales and Nintendo's bottom line to see whether their momentum can continue.
