Target (TGT -0.36%) reported underwhelming earnings results last week, as inflation and supply chain challenges weakened its performance. It was just one of several disappointing results from retailers this quarter, as American consumers navigate the current economic environment.
But commentary from Target's management during its first-quarter earnings call actually boosted my confidence about several other companies. "More and more, we are seeing our guests' increasing mobility and love of newness play out in their Target purchases as baskets shift more toward experiences and going out categories," Chief Growth Officer Christina Hennington told analysts.
While retailers may be suffering as consumer behavior shifts, companies in the travel and entertainment businesses could benefit. Here are three ways to play it: Uber Technologies (UBER 2.64%), Booking.com (BKNG 2.05%), and Alphabet (GOOG 1.25%) (GOOGL 1.27%).
Target's luggage sales increased 50%. Image source: Getty Images.
1. Uber: More summer nights out
Uber is the largest rideshare platform in the world, and it's starting to see positive results as it comes out of the pandemic. Active users increased 17% in the first quarter, and, importantly, trips increased 18%. While that's just one percentage point more than users, it indicates a reversal in the trend of users taking fewer trips. Airport trips increased to 13% of total bookings but still fall shy of the pre-pandemic level of 15%.
On the supply side of the network, Uber benefits from offering drivers multiple opportunities. The Eats business, and expansion into other courier services like grocery delivery during the pandemic, helped maintain driver supply over the last two years. As people start going out more, Uber could benefit from greater driver availability as a result.
Uber's also looking to capitalize on people's desire to go out. It launched Uber Explore last quarter, which recommends places to go out and allows users to make reservations or purchase event tickets within the app. The pilot launch could provide a new source of high-margin revenue.
Finally, Uber's increasingly focused on becoming profitable. Management is slowing hiring and cutting back on marketing and incentives. It's in a position to do so thanks to the strength of its delivery business over the last couple of years. After free cash flow came in around breakeven in the first quarter, management now expects positive free cash flow for the full year. After massive sell-offs in the stock, now may be an opportune time to pick up some shares.
2. Booking.com: More summer vacations
Luggage sales increased 50% year over year for Target in the first quarter. That means more summer vacations. And few companies are better positioned than Booking.com to capitalize on the increase in travel.
Booking.com is an online travel agency, and it earns revenue through commissions on sales. Hotel prices have skyrocketed as demand surges, leading to strong potential revenue for Booking.com. Indeed, the company set a new record for gross bookings in the first quarter despite room nights still down nearly 10% from three years ago.
Booking benefits from a strong network of hotels around the world, particularly in Europe. It also has a growing selection of vacation home rentals, as many travelers have grown to prefer them over hotels.
After a strong first quarter and signs of a return to travel, room night bookings ought to surpass 2019 levels this year. Management said room nights increased 10% in April from 2019 levels during its first-quarter earnings call. It's also expanding into more areas of travel, including flights and rental cars, providing more opportunities to generate revenue. The company's goal is to become a one-stop-shop for planning and booking a trip. The stock price is still at levels indicating it's battling pandemic headwinds, while it appears the company will generate record bookings this year.
3. Alphabet (Google): Making travel plans
The first step for many travel planners is a quick Google search, and it looks like consumers are searching again. Management said travel-related searches climbed past 2019 levels in the first quarter. Furthermore, travel was the second biggest contributor of ad revenue growth after retail for Google.
Travel has historically been one of Google's most important ad verticals, but that took a big hit during the pandemic as travel websites like Booking.com pulled back on their Google search ads. While some have reassessed their marketing spend, Google now stands in a strong position for travel advertising. Not only does it get explicit buyer intent from search keywords, it's also able to track conversions better after Apple's iOS privacy changes affected other ad platforms.
While Alphabet is a massive business with arms well beyond Google Search, the services business remains the core revenue source. YouTube disappointed in the first quarter, but it's still poised for long-term growth and is more differentiated from the competition than other social media platforms. Its cloud business continues to grow rapidly as well. After the sell-off in shares this year, it could be a good time to buy.
The bigger takeaway for investors
Target's earnings commentary gave further confirmation about consumer trends that were shaping the results of companies well outside of the retail industry. The big takeaway for investors might not be that travel and entertainment are making a big comeback this year, but that they can learn about other industry trends by reading reports from companies outside those they're most interested in.
