Retailing is a tough game in a very competitive, crowded, 24/7 international marketplace.
Just one public relations mishap can cause a retailer to lose an extraordinary amount of business. A small decline in sales can result in the share price dropping dramatically. Some investors shy away from the sector for that reason.
Yet, there will always be retail businesses that will succeed and flourish due to the right sales model, demand for its product and good management. The industry is also littered with failures, the most recent being;
- Roger David
- Max Brenner; and
- Dick Smith
The retail industry is huge, comprising of 4% of GDP and 10% of employment. There are lots of retail business listed on the ASX, including:
- Super Retail Group
- The Reject Shop
- Nick Scali
- Kathmandu
- Wesfarmers (Coles and Bunnings); and
- Woolworths Group
Assessing retail investments – the facts are in sales and margins
When determining whether to invest in a retail business, assess:
- How the retailer is continuing to grow sales and maintain or increase margins
- Whether sales growing at the expense of margins; or
- Whether are sales growing because the business has made acquisitions using shareholder funds
The ideal retail investment is:
- A growing business with continued sales growth
- An increasing number of stores funded internally by operations, rather than additional shareholder funds
- A wide, stable or increasing profit margin
- Attractive share price
Yes, you may potentially be looking for a unicorn. However, persistence in your search may lead you to a thoroughbred, and at a great price.
In retailing, good experienced management and the agile exercising of market and consumer knowledge is key to continually adapting and changing to the needs and wants of the consumer and the market environment.
You may find a retail company that has an underlying sound business but a temporarily low share price due to recent mismanagement negative news. This may present an opportunity to make a good value investment in their stocks.
There are currently two businesses that are of interest to me for those exact reasons. As investors, if we can identify retail businesses with the potential for sustained success and buy them at the right price (that is, those with a good margin of safety and intrinsic value), I say go for it.
For tailored information on retail investing or to book a complimentary consultation, please contact me at [email protected].