How Will Discover Financial (DFS) Fare This Holiday Season?

As a direct banking and payment services company in the United States, Discover Financial Services DFS has been gaining from the digital shift, primarily led by the COVID-19 pandemic this year.

Although the company like many other players in the same space suffered a blow from the coronavirus outbreak, things started looking up on the back of better online transaction/contactless payments. On its last earnings call, management said that sales improved across most categories, mostly in online retails, everyday spend categories and home improvement.

However, the same was partly offset by continued weakness in travel and entertainment segment.

The company is expected to continue performing well on the back of higher online sales this holiday season, leading to expansion in transaction volumes.

However, it has been witnessing pressure on its sales volumes due to lower spend on travel, etc. In the first nine months of 2020, Discover Card Sales Volume decreased 5% year over year. The company is making significant investments with major networks to implement Click-to-Pay as more and more people are shifting to online purchases.

The shift to contactless payments to restrict the spread of the virus is significant. COVID-19 compelled customers to indulge online shopping, which is likely to continue this festive season as well.

However, the holiday shopping trends will likely change according to Discover Financial’s annual Holiday Shopping survey. Per the same, 35% customers in 2020 plan to reduce holiday spend followed by an 18% in 2019. The survey also portrays that Generation X buyers and millennials are likely to cut down on expenses in 2020, by 42% and 36%, respectively.

Some of the major reasons behind this controlled spending are financial instability and disrupted social engagements. While 37% of people stated that financial crunch prompted their decision to spend less, 32% attribute it to lack of holiday gatherings. Another 28% confirmed that they do not require traveling like they have over the past years.

Per the survey, 74% consumers will be purchasing online while 61% talked about taking part in online shopping holidays such as Cyber Monday, Discover’s survey shows.
Shopping online is mainly driven by a sense of discomfort while shopping in crowds within a store. Even inside a store, customers are mostly favouring contactless payments to stem the spread of virus by not touching common surfaces.

In this survey, 78% millennials said that they will prefer cashless payments more frequently followed by Gen Z’s 75%, Gen X’s 70% and boomers’ 60%.

Per the National Retail Federation (NRF) forecast, the 2020 holiday sales season is expected to be very strong. This being said, the rapid shift from cash to digital modes of payment bodes well for the company. Therefore, purchases made through digital mediums are here to stay even after the pandemic subsides.

Other stocks in the same space including American Express Co. AXP, Visa Inc. V and Mastercard Inc. MA are also set to benefit from the recovery in international travel.

In the past six months, shares of this currently Zacks Rank #1 (Strong Buy) company have gained 60.3%, outperforming its industry's growth of 36.3%. You can see the complete list of today’s Zacks #1 Rank stocks here.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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