December 3, 2007

How to analyze a retailer? Part 2

In part one, read here, I discussed the macro and micro factors needed to understand the business of a retailer and its economics. In this post I want to share some additional aspects of an investment in a retail business. First I will talk some mistakes that investors may make in investing in retail business and then I will discus some general consideration about retail companies' stock prices.

Investor Mistakes in analysing a retail business:

  1. Allowing your personal shopping experience to influence judgement about the company. You are one data point you need several to make a judgement about the retailer shopping experience.
  2. Short term focus and placing too much importance on monthly same store sales and quarterly numbers. Retail turnaround or value creation take a long horizon.
  3. Corporate strategies and qualitative analysis is more important than retailer's metrics.
  4. Overpaying for retail business, this is applicable to any investment but with retailers you should not pay for any operation with a PE ratio above the stock market. As we discussed before retail is mature business and can't outgrow the market in general. Investors tend to over pay for speciality retailers as they are growing in sales.

Stock general observation:

  1. Retail is not a dividend play but generally it is a capital appreciation investment.
  2. growing retailers have no or low dividend payout ratios
  3. usually retailers will lead the market in its recovery from a down turn
  4. supermarkets are defensive stocks
  5. Christmas is the most important season in this business. Most retailers sales happen in this period.

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