One of the hottest subjects right now is the impending toy shortages expected this coming holiday season. Retail stores will be reliving the Arnold Schwarzenegger holiday flick, Jingle All the Way. Only, the fights for toys will be happening in October, not late November. That’s terrible news for parents but great news for these seven retail stocks to buy.
However, before you run out and buy any old retail stock that sells toys, you might want to take a more targeted approach. Not every retailer will be able to get its shelves stocked so far ahead of Black Friday.
“The supply chain issues are not going to correct themselves this fall,” BNN Bloomberg reported Canadian Toy Association spokesman Andrew Wagar saying on Sep. 29.
“There will be items that are going to sell out faster than usual and they’re going to be replenished slower than usual.”
Therefore, the companies you want to consider will be those large enough to have some pull with the toy companies themselves. You also might want to think outside the box. A maker of toys that sells online might also be the way to profit from the unusual circumstances shoppers find themselves in.
Here are the seven retail stocks that ought to benefit from the coming toy shortages:
- Disney (NYSE:DIS)
- Amazon (NASDAQ:AMZN)
- Walmart (NYSE:WMT)
- Target (NYSE:TGT)
- Hasbro (NASDAQ:HAS)
- Costco (NASDAQ:COST)
- Shopify (NYSE:SHOP)
Retail Stocks to Buy: Disney (DIS)
In case you’re wondering, I haven’t put the names on this list in any particular order. So, just because Disney is first doesn’t mean I think it’s the best retail stock to buy.
In August, Disney and Target announced that they would strengthen their existing partnership. As a result, the company plans to have 160 Disney stores open within current Target locations by the end of 2021. That triples the number of locations.
“The Disney shops, which Target launched in 25 of its stores in the fall of 2019, have proven to be a major hit, according to Target. The initial shops featured 450 items, more than 100 of which previously only could be found at Disney retail stores,” Forbes reported in August.
In the company’s Q3 2021 report, you’ll notice that its consumer products revenues increased by 57% to $1.16 billion. Consumer products are part of the Disney Parks, Experiences and Products (DPEP) segment. The company’s retail stores are also part of DPEP. They rose by 22% during the third quarter due to Covid-19 re-openings.
For the first nine months of 2021, its merchandise licensing and retail accounted for $3.98 billion in sales. That’s 36% of DPEP’s overall revenue of $11.1 billion.
Thanks to the 40% increase in operating profits for its consumer products business for the nine months ended July 3, 2021, DPEP only had an operating loss of $169 million.
Without the toy business and Disney+, 2021 could have been a disaster.
If anyone can overcome supply chain issues, it would be Amazon, the world’s leading e-commerce company.
Kaspien is a company that provides brands with the tools needed to sell better on Amazon. It says the toys and games companies it’s helped to increase sales on Amazon boosted their sales by 18% year-over-year between April 2020 and April 2021.
Interestingly, while Amazon Retail holds just 9% of the toy listings on Amazon, compared to 91% for third-party sellers, they generate 42% of its toy sales. Furthermore, toys represent the third-largest product category by revenue, behind only books and electronics.
The best and most certain figure I can find for Amazon’s U.S. toy sales is from 2017. That year it grew toy sales by 12% to $4.5 billion. Assuming Amazon kept this pace up, its 2021 U.S. toy sales could be as high as $7.1 billion. That’s 3% of its $236.3 billion in North American sales, including offline businesses such as Whole Foods and Amazon Go, etc.
In October, Amazon’s two-day Prime Day achieved more than $11 billion in sales, 6.1% more than its sales from 2020.
Amazon will figure out how to generate toy sales by hook or by crook during this challenging time.
Retail Stocks to Buy: Walmart (WMT)
As I’ve said, large companies like Walmart will be able to use their economic clout to get toys on the shelf for the holiday season. As a result, most parents are going there first to find their kid’s presents.
“The bigger companies that have more money, more economic clout because they place more orders, definitely have more scope to mitigate [supply chain constraints],” GlobalData industry analyst Neil Saunders told CNN Business. “Smaller chains just don’t have that economic power.”
The exciting thing is that the pandemic has meant parents have cash in the bank ready to spend for the holidays. But, unfortunately, many retailers aren’t going to be able to take advantage of the extra disposable income that’s sloshing around.
“Families have money to spend, and if the toys are available, they’re going to buy them,” James Zahn, senior editor of Toy Insider told CNN Business. “No matter what, kids will still play and parents will do whatever they can to do right by their kids.”
Normally, I wouldn’t think Walmart customers could absorb higher prices. However, this year is unique, which suggests Walmart will likely keep its toy sales growing. On the downside, the added cost of getting the toys here indicates that profits won’t be relatively as high.
According to IBISWorld, Walmart has an estimated 23.1% share of the U.S. toy market, while Amazon is second at 19.6%.
As I mentioned in the Disney section, Target’s making a big play for a larger share of the U.S. toy market. Supply chain issues are not going to slow CEO Brian Cornell down.
Target continues to experience strong toy sales. In the second quarter, toy sales increased by more than 20% during the quarter. That comes on the heels of same-store toy sales growth of more than 40% in the first quarter of 2021.
However, Target has hired its own ships to keep the good times rolling to ensure it doesn’t have too many inventory snafus. In addition, Macy’s (NYSE:M), which is opening more than 400 Toys R Us stores in 2022 but already sells its stuff online, is said to have ordered toys up to three months ahead of when it usually would do so for the holiday season.
The one thing we do know is that toy prices are going to be higher this holiday season. Hasbro has already said it increased prices to offset the cost of freight and commodities throughout its business.
The Target customer ought to be able to absorb price increases better than Walmart’s core customer. So I guess we’ll soon see.
Retail Stocks to Buy: Hasbro (HAS)
While Hasbro is a manufacturer of toys and not a traditional retailer, I put it on the list because of its growing digital gaming business.
If you go to page three of its 2020 10-K, you will see, under strategic risks, the following line: “A key to our future success will be our ability to further grow our digital gaming businesses.”
The company is developing digital games internally and through third-party developers. As a result, it has already launched Magic: the Gathering Arena, a digital version of its Magic: the Gathering trading card game. It has also launched a mobile app for this game.
Digital gaming will continue regardless of supply chain issues. For example, in the first six months of 2021 through June 28, Hasbro’s Wizards of the Coast & Digital Gaming unit had revenue of $648.5 million, 63% higher than a year earlier. That accounts for 26.6% of its overall revenue, up from 20.2% a year earlier.
More importantly, this segment accounted for almost all of Hasbro’s operating profits in the first half of 2021. Without it, the upcoming toy shortage would be a more significant concern.
When you visit your local Costco, I doubt you go specifically to buy toys. So, it’s not the retailer most people would name first when thinking about toy retailers to visit when doing your holiday shopping.
However, according to ecommerceDB, Costco has the ninth-largest online sales in the U.S. for toys, hobby, and do-it-yourself products. In 2020, Costco’s online sales in this area were apparently greater than $2.5 billion.
While significant, they don’t hold a candle to Amazon’s U.S. sales in this segment (greater than $20 billion) or Walmart (greater than $5 billion). The company’s 2020 10-K says online sales accounted for 6% of its overall revenue. If we assume the 6% also applies to its U.S. operations, its U.S. online sales in 2020 were approximately $7.3 billion, putting toys, hobby, and DIY at about one-third of its overall total.
I can’t say for sure if the $2.5 billion number is accurate, but if so, toys appear to be a big part of Costco’s online U.S. sales.
While it will be hurt by the supply chain snafus this holiday shopping season — like every other retailer in America — the fact that Costco’s average shopper is said to earn more than $125,000 a year, its customers should also be able to absorb higher prices this holiday season.
Costco, along with Target, remains two of my favorite retail stocks.
Retail Stocks to Buy: Shopify (SHOP)
No, Shopify isn’t a toy retailer.
However, its e-commerce platform will be helping online toy sellers around the world move more toys this holiday season. And, while the general sentiment is small retailers don’t stand a chance against the Walmarts of the world when it comes to fighting the potential shortage, I’m sure it will do what it can to alleviate the problem.
It was recently reported that Shopify passed Amazon in online traffic. According to data from marketing research firm Similarweb, Shopify had 1.16 billion average MUVs (average monthly unique visitors), 60 million higher than Amazon at the end of June.
Shopify is expected to generate 1.22 billion MUVs, 90 million higher than Amazon in the September quarter. It continues to provide small businesses with a superior alternative to selling their wares on Amazon. This includes focusing on cross-border sales of its merchants.
I don’t know how this translates into toy sales come the holiday season, but if its traffic continues to outpace Amazon, investors can be sure that the revenues will follow for Shopify.
Down 11% over the past three months, now might be the perfect time to buy into SHOP stock.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.