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Will Target and Disney’s New Collaboration Send Each Stock Soaring?

On August 25, Target Corporation (TGT) announced that it’s teaming up with Walt Disney (DIS) to open 25 Disney stores within its own locations. Starting October 4, customers will be able to find specialty products from Disney, Pixar, Marvel and Star Wars. The Disney "shop-in-shop" stores will be operated by Target employees and carry more than 450 items including toys, games and clothing.

The good news doesn’t end there. The companies are planning to add an additional 40 locations by October 2020 as well as a small-format Target store near the Walt Disney World Resort in 2021.

With Target and Disney each seeing year-to-date growth of 57% and 22%, respectively, investors are wondering if this collaboration will send shares soaring to new heights.

Let’s dig a little deeper to find out.

The Deal is a Win-Win

With the stores slated to open ahead of the holiday shopping season, each company stands to benefit from the collaboration.

The partnership will help DIS expand its access to customers beyond its mall locations, according to the company's chairman of parks, experiences and products Bob Chapek. It will also increase DIS’s store count by about 22%.

Target on the other hand is expected to get a major sales boost from the deal. While CEO Brian Cornell didn't say how much Disney merchandise currently brings Target in terms of sales, or how much revenue is expected to be generated from the Disney store expansion, he did express that the brand relationship with Disney is very important to the company. TGT has placed a significant focus on expanding its national brand partnerships, with it announcing that Levi Strauss (LEVI) apparel will be added to stores starting August 11.

Target Already Looks Solid After Q2

The collaboration comes after a strong second quarter earnings release from Target. Investors originally expressed concern that a shift toward multichannel selling would negatively impact profits. However, this was not the case.

On August 21, it posted an earnings beat as well as raised its full year guidance thanks to its investment in same-day delivery and pickup services that increased traffic to its website and stores. Same-day fulfillment orders grew by over 100% in the quarter, making up 75% of its total digital sales.

One top analyst, Paul Lejuez, is kicking himself for not recognizing TGT’s potential earlier. However, the Citigroup analyst vows not to make that same mistake twice as he now views the stock as a winner in the retail space. “TGT is demonstrating their investments (which once seemed never-ending) are paying off as comps have been strong, including positive store traffic (rare in retail these days),” he noted. As a result, the 4.5-star analyst upgraded TGT from a Hold to a Buy and raised the price target from $80 to $130 on August 22. The price target boost suggests share prices could climb 26% in the next twelve months.

Disney's Strong Long-Term Growth Narrative Remains Unchanged

DIS reported less impressive results during its August 6 Q3 earnings release, with earnings and revenue falling below consensus estimates. Management blamed the miss on its integration of Fox’s (FOXA) entertainment assets it acquired for $71 billion in March. That being said, the launch of its streaming service, Disney+, in November as well as its upcoming blockbuster movie slate and several other initiatives are expected to drive future revenue growth.

Credit Suisse analyst Douglas Mitchelson agrees that its performance in Q3 shouldn’t deter investors. “In date order, we expect: (1) successful pay TV distribution renewals increasing confidence in affiliate revenue; (2) August 29 Star Wars Land opening at WDW in Florida and the key Rise of the Resistance attraction opening Dec / Jan at WDW / DL in California to drive Parks after its F3Q19 air pocket; (3) Numerous marketing / distribution partnerships to be announced leading up to the Disney+ November 12, U.S. 2019 launch; (4) FY20 to begin with a strong film slate (Star Wars 9; Frozen 2); and (5) Fox results to rebound during FY20," the 4.5-star analyst explained. As a result, he upgraded the rating from a Hold to a Buy and raised the price target from $130 to $150 on August 8. Mitchelson thinks shares could surge 14% over the next twelve months.

The Bottom Line

All in all, the Street is cautiously optimistic about TGT. 13 Buy ratings vs 6 Holds received over the last three months add up to a ‘Moderate Buy’ analyst consensus. Its $114 average price target suggests 9% upside potential.

Wall Street analysts take a more bullish stance on DIS. It boasts a ‘Strong Buy’ analyst consensus and a $156 average price target, implying 18% upside potential.

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