The weakest link at Disney (NYSE:DIS) is its merchandise business. It’s so weak it’s no longer a separate division in the company’s otherwise highly transparent quarterly reports. Instead it’s lumped in with the revenue from amusement parks, the biggest segment of the business.
The toy segment is weak because Disney never learned how to make video games. Instead it turns such properties as “Toy Story” and “Star Wars” into plush dolls and action figures, mainly sold at the parks. Free-standing toy stores have been disappearing for years.
But in a move labeled as “brilliant” in the business press, Disney is putting mini toy stores inside 25 Target (NYSE:TGT) locations, with plans to open 40 more next year and for Target to open a small-format store near Disney’s Orlando resort in 2021.
Why Both Sides Should Win
The move is smaller than it looks but could prove to be a win-win. Outside the parks Disney has mainly been selling its merchandise in Disney Stores, located in select malls and downtown locations. But malls are dying. The number of Disney stores has declined from almost 750 to just 300 over the last two decades.
Target, meanwhile, still needs a way to differentiate itself from Walmart (NYSE:WMT), especially in its larger outlets. The Disney branding does that.
Striking the deal now also lets Disney ride the glory of Target’s most recent quarter, which sent shares rocketing upward by 20% on same-store sales growth of just 3.4%.
While Target is said to be in the retailing “big leagues” by analysts and reporters, it’s still, like the hometown Minnesota Twins, a small-market team. The company is valued at over two-thirds its annual sales, but those sales were just $76 billion last year. That’s barely half the size of Kroger (NYSE:KR) and barely one-seventh of Walmart’s annual revenue of $515 billion.
What makes Target stand out from the pack is its dividend, a 66 cent per share payout that represents a yield of over 2.5%, even after its post-earnings gain. With the U.S. 30-year bond yielding under 2%, that’s fabulous, especially since Target earned $1.83 per share in the most recent quarter.
Disney Stock’s New Retailer
By working with Target instead of the larger Walmart, Disney gets more control over the relationship. Its market cap is nearly five times larger than Target’s at $242 billion, even though its revenue is smaller at $65 billion.
The initial Disney-Target units will mostly be in large, suburban stores that compete directly with Walmart. The units will be family-oriented, located between the children’s clothes and toy departments. They will feature merchandise from new Disney movies aimed at kids, like “Frozen 2” and “Star Wars: The Rise of Skywalker.” There will be Disney-Target units within a cab ride of the Denver, Dallas, Chicago and Houston airports.
Disney has also opened a special section on the Target website. Supposedly this makes the deal “bad news” for Amazon (NASDAQ:AMZN).
The Bottom Line for DIS Stock and TGT Stock
The Disney-Target move is not a major financial event.
It is, however, a major branding event. It demonstrates how Disney can maneuver in a world where there’s no longer a Toys “R” Us and how Target can gain branding power even though it’s an off-price store.
I wouldn’t buy either stock based solely on this news. Income investors may continue piling into Target shares until the rumors of recession turn into lower consumer spending, or government borrowing sends interest rates rocketing higher. As for Disney, let’s see how much cash Disney+ generates.
Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental story, Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in KR and AMZN.
