Both Target and Disney (DIS 0.84%) have strong brand appeal and a loyal customer base. While Target (TGT) benefited from the COVID-19 pandemic, seeing its revenue rise as shoppers stocked up, Disney's business was hurt by the shutdown of theme parks and movie theaters. However, both consumer discretionary companies appear well positioned in a post-virus world.
Here's a more detailed look at which one is the better investment right now.
Disney's revenue for fiscal year 2020 declined by 6%, while fourth-quarter (ended Oct. 3) revenue decreased by 23% year over year, due to a contraction in business from parks, experiences, and products segment and also from the studio entertainment segment. Adjusted earnings for the full fiscal year fell by 65%. Earlier, third-quarter revenue dropped 42% and adjusted earnings declined 94%.
However, after a challenging time for theme parks and entertainment venues due to COVID-19, there could be pent up demand for leisure experiences when the virus subsides. For much of 2020, Disney saw its theme parks closed, or only open with significantly reduced capacity. Additionally, its cruise ship sailings and guided tours have been shut down since the second quarter of 2020.
Now there's hope of a return to normalcy with the rollout of vaccines and treatments for the virus. As many people put off travel and theme park visits since the start of the pandemic, there may be heightened demand once they feel safe again. Visits to movie theaters could likely also go up. However, there's uncertainty around the timing of this shift.
Direct-to-consumer will be a long-term growth driver
Disney's direct-to-consumer business is projected to drive growth with streaming businesses like Disney+, Hulu, and ESPN+. This segment (along with international) comprised about 26% of total revenue in fiscal year 2020, and saw revenue growth of 81% in fiscal year 2020. The global availability of Disney's streaming content boosted the success of this business unit, as the company had deals with Apple, Google, Roku, and more.
Despite only launching in November of 2019, Disney+'s growth is impressive, reaching 86.8 million subscribers as of Dec. 2, 2020, up from 73 million at the end of the fourth quarter (ending Oct. 3). The content is resonating with consumers, and Disney has highly anticipated features in the pipeline, such as Loki, additional seasons of The Mandalorian, and Raya and The Last Dragon.
Media and Entertainment Chairman Kareem Daniel spoke of the importance of direct-to-consumer (DTC) at Disney's Investor Day: " ... we are prioritizing our DTC platforms -- both in terms of how we distribute our content and also through our increased investment in original programming for Disney+, Hulu, ESPN+, and the upcoming Star-branded international general entertainment offering. By significantly ramping up production for these services, we will not only accelerate the growth of our DTC businesses but also solidify our deep and very personal relationship with consumers globally."
In its latest third-quarter (ended Oct. 31) earnings report, Target reported a 105.1% increase year over year in adjusted earnings, and a 21.3% increase in revenue. For the nine months ended Oct. 31, adjusted earnings rose 25% year over year, and revenue increased 19.2%. Strong sales growth, market share gains, and popular fulfillment options all helped drive business.
Target is one of the retailers that benefited from the shifts in consumer behavior related to COVID-19. As people made fewer shopping trips but often spent more on average per trip, Target benefited as a one-stop-shop offering necessities like groceries and discretionary items like home decor. When social distancing and restrictions spurred an increase in e-commerce, Target's business was boosted by its e-commerce strength.
Target is well positioned to succeed even post-COVID-19
Even when COVID-19 subsides, shoppers will still frequent Target. With continued economic uncertainty and new policies under a different administration, U.S. consumers will likely gravitate toward stores offering both value and quality goods. As a brand known for its reasonably priced goods and variety, Target addresses this need.
Further, Target is regularly refreshing its products and brands offered in stores, to improve its guest experience. In November, Target announced it would partner with Ulta Beauty (ULTA -1.57%) to bring Ulta makeup shops to hundreds of Target stores in 2021, bringing Ulta's expertly curated beauty products to its customers. In October, Target announced an expansion of offerings with partner Levi Strauss & Co. (LEVI -1.89%), to bring Levi's popular Red Tab label to hundreds of stores.
Target's digital segment is strong
Target saw its comparable digital sales increase by 102% over the November/December holiday period. In the fourth quarter, comparable digital sales rose by 155%. Consumers are gravitating to fast, convenient, and safe shopping services, and turning to retailers with the infrastructure and customer service to support it.
CEO Brian Cornell commented on Target's third-quarter earnings call: "Within digital, we continued to see the strongest growth in our same-day services, pick up, drive up, and ship, which, together, grew more than 200% in the quarter. These services are fast, convenient, reliable, and contactless, which explains why they continue to generate very high levels of guest satisfaction."
While both companies have impressive businesses and growth figures, I see Target as the better investment because it will thrive in a world with or without COVID-19. Further, its growth strategies are aligned with long-term consumer preferences toward e-commerce and value. The retailer is well positioned to thrive in a variety of environments. While Disney may benefit from a return to pre-COVID-19 theme park and movie theatre attendance, there's risk that many people will remain cautious and avoid crowded areas even after COVID-19 cases start to subside. Valuation-wise, Target is also trading at a more appealing forward P/E of 22 times versus Disney's pricier 85 times.