My, how times have changed. As a child, gift cards did not exist as they do in current form. They were the more simple gift certificates in those days -- no plastic card, no magnetic strip, but with some bearing very ornate designs. One of the most desired to find in your Christmas stocking back in the day was the $5 book of McDonald's gift certificates, as I recall, each worth 50 cents.
Today, you can go anywhere -- CVS (CVS) , Walmart (WMT) , Home Depot (HD) , Costco (COST) , you name it -- and purchase gift cards for hundreds of restaurant chains and retailers. The market is huge, and expected to grow to $180 billion in sales this year. According to website Gift Card Granny, which among other things functions as an informational gift card secondary market of sorts, about 93% of Americans as of 2015 had purchased gift cards, with the most popular categories being restaurants (34.8%) followed by department stores (34.4%). About half of consumers (50.4%) purchase gift cards for the holidays.
Retailers love them, too. What better way is there to lock in revenue? In addition, it is estimated that 6% to 10% of gift cards go unused. However, federal regulations dictate that gift cards cannot expire for five years. In addition, there are rules about dormancy, inactivity and service fees. States also are permitted to have their own rules, and they can be more stringent than federal regulations; for instance, California does not allow expirations.
Nonetheless, gift cards can provide a solid and guaranteed stream of revenue for issuers. There also is a new FASB (Financial Accounting Standards Board) revenue recognition rule, ASC 606, that will go into effect in early 2018 and will allow gift card issuers to recognize the unredeemed portion of gift cards earlier.
The granddaddy of them all for this holiday season, and perhaps any season, has to be the Amazon.com (AMZN) gift card. This is a top choice due to the endless possibilities for consumer usage; you are not locked into a single product or product type. In a world where there seems to be 37 different varieties of Pop Tarts, consumers seem to love choice. In addition, Amazon gift cards never expire and have no fees. Given Amazon's penchant for seeking high revenue but sacrificing on the profit side, I wonder if the company will ever sweeten its gift card offering by allowing them to appreciate in value or adjust for inflation. At year-end 2016, the company had nearly $2.4 billion in unredeemed gift cards outstanding. (Amazon is a holding of the Trifecta Stocks portfolio.)
Another must-have gift card is for Starbucks (SBUX) . I admit it that I still don't get the notion of paying $4 for a cup of coffee that is no better in my opinion than what I can brew at home for pennies, but I am obviously in the minority here. (Starbucks is a holding of Jim Cramer's Action Alerts PLUS charitable trust.)
In terms of retailers, Walmart gift cards will be another big winner this season. The grocery business does not hurt here; consumers can choose to purchase food or merchandise, both at great prices. To a lesser extent, I'd also throw Target (TGT) into this mix.
Finally, those that discount their gift cards should do well this holiday season. Costco is notorious for selling $100 of gift cards for $79.99; during a weekend visit to our local store, I noticed that deal being offered for Bonefish Grill, which is part of Bloomin' Brands (BLMN) and happens to be a personal favorite in the casual dining space.
If you don't like the gift cards you receive and want to sell them at a discount, there is a thriving secondary market. There also are literally hundreds of possibilities to buy cards at a discount.
Interestingly, a recent view of the secondary markets reveal that Amazon gift cards command the lowest discounts, at around 1%. They are darn near currency these days.