Retail Therapy
|
|
|
|
Intro |
|
This week, everyone is thinking about two things: |
|
|
|
Even though this week is about being thankful for the lives we have, it is more often a week spent shopping and spending way too much on significant “discounts”: |
|
|
|
With holiday shopping szn in full swing, we decided to dig into the retail sector and see if some companies are worth investing in. |
|
Retail Sector |
|
Retail is the final step in the distribution process of goods and services. As consumers, it is the stores that we go into to purchase toys, groceries, electronics, automobiles, food, clothing, sporting goods… |
|
This list goes on for a while. |
|
Many companies get roped into the “Retail” Industry. This makes it hard to pass judgment on the industry because we evaluate low-margin grocery stores and high-end electronic and personalized automobile sales in the same category. |
|
Most of us think of retail companies as players like Target, Walmart, Costco, and other big box stores. |
|
But according to Company Market Cap, the top 10 largest retail companies span a broader range of sectors, from home repair and maintenance to groceries and medical supplies, along with general merchandise stores: |
|
|
|
We will narrow our focus to general merchandise retailers like Walmart, Target, and Costco, along with dollar stores, since they often sell the same basket of goods. |
|
Each of these companies specializes in different merchandise areas, so we’ll use a few key metrics to understand better how they stack up against each other. |
|
Within the retail industry, one metric can be broadly applied to help us understand how a company is doing on an individual store level. |
|
Same Store Sales. |
|
Education |
|
We want to start using this newsletter to help YOU learn more about how to invest and not just which companies to buy. |
|
With that in mind, we will take time each week to review key metrics and ratios to understand how to apply them better. |
|
Same Store Sales (SSS) provides insight into how each store is growing (or shrinking) sales. |
|
The generic definition is the year-over-year (or sometimes month-over-month) sales growth at a store that has been in business for at least one year. |
|
This means we are focusing on sales of “mature” storefronts and separating revenue boosts gained from opening new locations. |
|
Seeing those sales metrics gives us insight into the location selections made by management: |
|
Have they chosen the right location to drive sales? Or did they choose the wrong place, and sales have shrunk? |
|
Are they spending capital wisely by building in a location that will continue to grow the business? |
|
It also helps to separate new store sales from existing sales. Is the company getting a large chunk of revenue from opening many new stores annually? |
|
Or are the prior locations growing revenue organically without new store sales numbers boosting overall revenue? |
|
Higher same-store sales growth shows that management effectively grows revenues without building new locations. |
|
Digging deeper into same-store sales allows management to understand better why revenue is growing or shrinking. |
|
Are there more customers coming to the store? Did a competitor open up nearby and steal existing customers? |
|
Are customers spending more on oversized ticket items, or have they resorted to spending less with each trip? |
|
All of these questions give management better insight into the business operations at each location and help them strategize ways to improve sales and drive revenue growth. |
|
Another critical metric used to analyze performance in the retail sector is Sales per SqFt. |
|
This metric helps investors to understand how efficient companies are with storefront real estate. |
|
Does the company utilize its space well to drive more sales? |
|
|
|
As you can see, there is a clear frontrunner here – Costco. |
|
Costco Wholesale Corporation |
|
|
|
Costco operates a “membership warehouse” where they only sell a limited quantity of items in bulk to members. |
|
We buy most of our merchandise directly from manufacturers and route it to cross-docking consolidation points (depots) or directly to our warehouses. Our depots receive large shipments from manufacturers and quickly ship these goods to warehouses. |
|
This process creates freight volume and handling efficiencies, lowering costs associated with traditional multiple-step distribution channels. …efficient distribution and reduced handling of merchandise in no-frills, self-service warehouse facilities; these volumes and turnover enable us to operate profitably at significantly lower gross margins (net sales fewer merchandise costs) than most other retailers. |
|
We often sell inventory before we are required to pay for it, even while taking advantage of early payment discounts. |
|
Costco takes a different approach to store layout – rather than making the store pretty and appealing to shoppers, they went the ultimate Marie Kondo route and said, “stack merchandise as high as possible!” |
|
Stacking products high and on pallets allows Costco to quickly transfer stock from the trucks directly to the sales floor. |
|
Customers do not go to Costco for “good vibes” – they know they are going into a warehouse with concrete floors and aisles 20-30 feet tall to buy a 12-pack of Ranch. |
|
But they do so knowing that they probably pay less per ounce at Costco vs. Walmart or Target. |
|
This approach gives Costco further use of its funds – rather than spending money on making the store more customer-friendly or drawing spenders in with frills and thrills, Costco can spend that excess money on buying better products or building new stores. |
|
Bulls |
|
|
|
|
|
|
|
|
|
Bears |
|
|
|
Key Metrics as of 11/25/2022 |
|
|
|
Conclusion/Recommendation |
|
If the fixed price of a hot dog combo didn’t convince you, we think Costco is one of the better retail options out there. |
|
Not only do they stand above competitors when it comes to same-store sales and sales per sqft, but they also can spend more time providing value to customers because of the profit derived from membership fees. |
|
Retail is often considered a cyclical industry - it does well when the economy does well and poorly when the economy slows down. |
|
Costco is unique in that it rides those waves very well - performing well even when the economy is slowing down or heading toward a recession. |
|
Who would have thought that customers would still be interested in buying that 12-pack of ranch even when the world is crumbling around them! |
|
Year-to-Date, while the broader market is down about 15%, Costco is only down 5%: |
|
|
|
Costco is a great way to get exposure to the retail industry and a solid choice on the precipice of a recession. |