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Better Buy: Disney vs. Target

Disney (NYSE: DIS) and Target (NYSE: TGT) are both iconic American brands, but their stocks went in opposite directions over the past 12 months.

Disney's stock dipped over 10% as the COVID-19 crisis slammed its movie and theme park businesses. Meanwhile, Target's stock rallied more than 60% as the crisis shut down smaller retailers and caused shoppers to stock up on essential goods.

But do those near-term trends indicate Target is a better long-term investment than Disney? Let's dig deeper to find out.

Image source: Getty Images.

How does Disney make money?

Disney generated 40% of its revenue from its media networks last quarter. Another 31% came from its parks, experiences, and products; 23% came from its direct-to-consumer and international unit; and 14% came from its studio entertainment division. That total exceeded 100% due to inter-segment eliminations.

Disney's media business was already a sore spot before the COVID-19 crisis started. Cord-cutters caused cable networks like ESPN and the Disney Channel to shed viewers, while ad revenue at broadcast networks like ABC declined.

Disney is trying to offset that decline with its Disney+, ESPN+, and Hulu streaming platforms, but it's racking up billions in losses to challenge Netflix and other entrenched platforms. Disney had counted on its theme parks and movies to support its streaming expansion with stable cash flows, but the COVID-19 crisis disrupted those plans.

As a result, Disney suspended its dividend, announced a new $11 billion debt offering, and brought back former CEO Bob Iger as its executive chairman to assist CEO Bob Chapek. The COVID-19 crisis forced Disney to pivot from expansion mode into crisis management mode -- and it's unclear when the pain will end.

How does Target make money?

Target operates nearly 1,900 stores across the United States. About 75% of all Americans live within ten miles of a Target store, and it owns the sixth-most-visited e-commerce website in the U.S., according to SimilarWeb.

Image source: Target.

Target survived the retail apocalypse by scaling up its operations, upgrading its e-commerce capabilities, and using its brick-and-mortar stores to fulfill online orders. It fulfilled 80% of its digital orders with its stores last quarter, while same-day services like Order Pick Up, Drive Up, and Shipt experienced 278% growth. Target also renovated its older stores and launched smaller-format stores for urban areas.

Beauty and household essentials generated 27% of Target's revenue last year. The food and beverage, apparel and accessories, and home furnishing and decor categories each generated about 19% of its revenue, while hardline products accounted for the remaining 16%.

Unlike Disney, Target didn't suspend its 2% dividend. It issued $2.5 billion in new bonds and secured a new $900 million revolver to buoy its cash flow through the crisis, but its stores were actually so busy it started limiting its store traffic for social distancing reasons in April.

Limited visibility throughout the COVID-19 crisis

Disney's revenue rose 17% in fiscal 2019 (which ended last September), but its adjusted EPS dropped 19% as the weakness of its cable business and its higher streaming investments crushed its margins.

In the first half of fiscal 2020, Disney's revenue rose 29%, but its adjusted EPS plunged 38%. The headwinds it faced in 2019 intensified, and the closure of its theme parks and movie theaters throughout the second quarter exacerbated that pain.

Disney didn't provide guidance for the rest of the year due to COVID-19, but a few flickers of hope are on the horizon: It launched new documentaries in the absence of live sports on ESPN, it recently reopened Shanghai Disney, and it revealed that Disney+ had surpassed 15 million paid subscribers in early April. Analysts expect Disney's revenue to rise just 1% this year as its earnings tumble 49%.

Target's comparable store sales grew 3.4% in fiscal 2019 (which ended this January). Its total revenue and adjusted earnings rose 2% and 18%, respectively. In the first quarter, which bore the full impact of the COVID-19 crisis, its comps surged 10.8% and boosted its revenue 11%. However, rising fulfillment and supply chain costs, along with a higher mix of low-margin essential products, cut its adjusted earnings by 61%.

Target also declined to provide guidance for the full year, but the crisis is a double-edged sword: It's boosting the company's revenue, but not in the higher-margin categories that would benefit its margins. That's why analysts expect its revenue to rise 5% this year, but for its earnings to tumble 17%.

The winner: Target

Disney and Target both face significant headwinds this year. However, Target's challenges are easier to quantify than Disney's.

Target's margins should stabilize as consumers start buying higher-margin products again and it fulfills a higher percentage of its digital and same-day orders from its existing stores. Disney faces the daunting task of restarting its theme park and movie businesses during a pandemic as its streaming unit racks up more losses.

Disney will survive the downturn, but the closest catalysts remain far off, and it isn't rewarding patient investors with dividends. Target will likely remain a safe haven stock -- despite its contracting margins -- which makes it a stronger overall buy in this volatile market.

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Leo Sun owns shares of Walt Disney. The Motley Fool owns shares of and recommends Netflix and Walt Disney and recommends the following options: long January 2021 $60 calls on Walt Disney and short July 2020 $115 calls on Walt Disney. The Motley Fool has a disclosure policy.


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