A few months back, I had a post where I poked some (light) fun of investors whose portfolio consisted of 10 retail stocks all priced like they were about to be the next Walmart or Home Depot.
$RH? It has already proven its concept, it has a major runway ahead. It’s a bit different because its growth doesn’t come in the traditional way of just opening more and more locations like a copy-paste. They are building a luxury brand as they grow it. Also a great capital allocator that runs the show!
Here is the problem with retail. Because of inflation, retailers are paying employees a lot more. If inflation slows, that won't lower labor expenses.
Sticker shock will take a long time to wear off. And those of us who covered and lived with inflation from 1965 through the mid 1980s know today's low commodity prices can bottom out at any time.
And then there are the Russia and China problems that all retailers are dealing with.
Worse, which private equity, hedge fund and venture capital speculators are putting money into retail? Why and why not?
Take a look at Walgreens (WBA). I'm in it because I'm hoping it can solve is staffing and business model problems while paying a very cuttable and high dividend. I'm selling covered calls on the stock and reducing my net debit by collecting dividends and calls options premiums with very low delta and low risk options trades.
WBA is not a growth stock. It isn't adding many stores or starting new ventures. And it's not really a buy now. But I'm getting a good return on risk while I wait for the thing to rally.
I specialize in recycling Amazon boxes and envelopes. DW is a senior who shops Publix and useless Kroger's delivery service while buying staples and some packaged foods on Amazon. I don't see her going to the malls or shopping like she used to do. Seniors have a lot of disposable income, but are they returning to the malls. Can any retailers find ways to get people back in stores?
Some malll REITs are seeing more mall traffic, but their stocks aren't impressing me. Macerich Co. (MAC) is a 40% sell on Barchart.com. But then, I think REITs are bad investments and always have been.,
The bottom line is I don't see a good retail trade. Stephany Link likes TJX (a 100% buy on Barchart.com) and some others are touting Ross (ROST) a 100% buy, and Burlington Stores (BURL) an 8% buy.. But I don't know if they're talking their books, or what? Dollar General is a 40% sell. WBA is a 100% sell. AMZN is 100% buy. WMT is a 24% buy.
What about expansion outside the US? I thought about a similar situation whereby a retailer or brand opens their first store outside the US (UK, France, Dubai, China) and if the products are loved then the stock may fly (recently Lululemon)
This blog post got me immediately thinking about Coupang with their expansion into Taiwan. Similar analogy with countries in the Asia rather than regions in the US. Likely too early to call, but expanding outside of their specific South Korean market could be a very important inflection point for the business.
I just do not get the valuations. I feel like Amazon is the generational mega trend and the rest of the sector is probably a short, but I’m happy just not being exposed there.
Not your typical retail candidate, but I'm surprised by how consistent JYNT Chiro's expansion was in terms of patients per location/time to location break-even has been as they grew nationwide from ~100 stores to ~800.
My vote is car dealerships. These businesses generate high RoEs, are consolidating & sell for cheap multiples which make buybacks count. If you look at the auto value chain, they generate amongst the highest RoICs & have been around for over 100 years. I like $ABG in the US and Bilia in Scandi and Nextage in Japan. The biggest threat is EVs but it appears all of the EV makers, except $TSLA are introducing EV via dealers. With EVs dealer service has remained about the same but the items serviced are different. Dealers will get a material uptick in service revenue once autonomous driving is allowed as sensors need calibration to work correctly. I also think EV roll out will take longer than expected.
I haven't done or seen the quantitative analysis you are referring to (would be very interesting to see!) but your piece reminded me of reading the Nick Sleep letters. He was early into Costco and Amazon, and his basic thesis was to identify retailers who were focused on offering a better value proposition to customers and thereby achieving a flywheel effect rather than optimizing near-term profit. Costco, for example, famously manages to a fixed gross margin on goods sold and passes all savings they get from scale onto the consumer. This could be thought of as "investing through the income statement" except it would be very hard to identify quantitatively because the investment comes in the form of intentionally suppressing gross margins! Once a business like Costco reaches a certain scale then they become very hard to catch as they have the best ability to invest in technology and negotiate with producers. Walmart seems to have been a very similar case to Costco. Amazon is the same flavor but a little different: instead of optimizing on price they seem to plow their gross profit into R&D and their distribution system allowing them to dominate on convenience. Another key to this model is that, because profits are kept artificially low, the stocks tend to be cheap and any share repurchases are more impactful.
I think the key thing to look for is a player that has reached the largest scale in its market and is laser focused on growing revenue rather than growing operating margins. The market must also have some kind of benefits to scale. After such a business gets a significant lead their moat becomes very strong and their expansion across the country/world becomes inevitable.
$RH? It has already proven its concept, it has a major runway ahead. It’s a bit different because its growth doesn’t come in the traditional way of just opening more and more locations like a copy-paste. They are building a luxury brand as they grow it. Also a great capital allocator that runs the show!
Here is the problem with retail. Because of inflation, retailers are paying employees a lot more. If inflation slows, that won't lower labor expenses.
Sticker shock will take a long time to wear off. And those of us who covered and lived with inflation from 1965 through the mid 1980s know today's low commodity prices can bottom out at any time.
And then there are the Russia and China problems that all retailers are dealing with.
Worse, which private equity, hedge fund and venture capital speculators are putting money into retail? Why and why not?
Take a look at Walgreens (WBA). I'm in it because I'm hoping it can solve is staffing and business model problems while paying a very cuttable and high dividend. I'm selling covered calls on the stock and reducing my net debit by collecting dividends and calls options premiums with very low delta and low risk options trades.
WBA is not a growth stock. It isn't adding many stores or starting new ventures. And it's not really a buy now. But I'm getting a good return on risk while I wait for the thing to rally.
I specialize in recycling Amazon boxes and envelopes. DW is a senior who shops Publix and useless Kroger's delivery service while buying staples and some packaged foods on Amazon. I don't see her going to the malls or shopping like she used to do. Seniors have a lot of disposable income, but are they returning to the malls. Can any retailers find ways to get people back in stores?
Some malll REITs are seeing more mall traffic, but their stocks aren't impressing me. Macerich Co. (MAC) is a 40% sell on Barchart.com. But then, I think REITs are bad investments and always have been.,
The bottom line is I don't see a good retail trade. Stephany Link likes TJX (a 100% buy on Barchart.com) and some others are touting Ross (ROST) a 100% buy, and Burlington Stores (BURL) an 8% buy.. But I don't know if they're talking their books, or what? Dollar General is a 40% sell. WBA is a 100% sell. AMZN is 100% buy. WMT is a 24% buy.
What about expansion outside the US? I thought about a similar situation whereby a retailer or brand opens their first store outside the US (UK, France, Dubai, China) and if the products are loved then the stock may fly (recently Lululemon)
This blog post got me immediately thinking about Coupang with their expansion into Taiwan. Similar analogy with countries in the Asia rather than regions in the US. Likely too early to call, but expanding outside of their specific South Korean market could be a very important inflection point for the business.
ATD/ CASY are what I would consider to fit in this criteria.
I just do not get the valuations. I feel like Amazon is the generational mega trend and the rest of the sector is probably a short, but I’m happy just not being exposed there.
Five Below seems to fit the bill, 4-wall EBITDA margin of 25%, with payback period per store of less than 1 year.
Not your typical retail candidate, but I'm surprised by how consistent JYNT Chiro's expansion was in terms of patients per location/time to location break-even has been as they grew nationwide from ~100 stores to ~800.
My vote is car dealerships. These businesses generate high RoEs, are consolidating & sell for cheap multiples which make buybacks count. If you look at the auto value chain, they generate amongst the highest RoICs & have been around for over 100 years. I like $ABG in the US and Bilia in Scandi and Nextage in Japan. The biggest threat is EVs but it appears all of the EV makers, except $TSLA are introducing EV via dealers. With EVs dealer service has remained about the same but the items serviced are different. Dealers will get a material uptick in service revenue once autonomous driving is allowed as sensors need calibration to work correctly. I also think EV roll out will take longer than expected.
Look in to $rmbl it’s a power-sport Dealor group
What about ULTA.... ? off what appears to be recent lows but seems to be priced attractively and capital efficient
I haven't done or seen the quantitative analysis you are referring to (would be very interesting to see!) but your piece reminded me of reading the Nick Sleep letters. He was early into Costco and Amazon, and his basic thesis was to identify retailers who were focused on offering a better value proposition to customers and thereby achieving a flywheel effect rather than optimizing near-term profit. Costco, for example, famously manages to a fixed gross margin on goods sold and passes all savings they get from scale onto the consumer. This could be thought of as "investing through the income statement" except it would be very hard to identify quantitatively because the investment comes in the form of intentionally suppressing gross margins! Once a business like Costco reaches a certain scale then they become very hard to catch as they have the best ability to invest in technology and negotiate with producers. Walmart seems to have been a very similar case to Costco. Amazon is the same flavor but a little different: instead of optimizing on price they seem to plow their gross profit into R&D and their distribution system allowing them to dominate on convenience. Another key to this model is that, because profits are kept artificially low, the stocks tend to be cheap and any share repurchases are more impactful.
I think the key thing to look for is a player that has reached the largest scale in its market and is laser focused on growing revenue rather than growing operating margins. The market must also have some kind of benefits to scale. After such a business gets a significant lead their moat becomes very strong and their expansion across the country/world becomes inevitable.
Thanks for this.
I just went and downloaded the letters.
Can i get a Black Friday discount on the premium posts!
I very much appreciate your interest, but I decided a while ago that I'm selling a premium product that I should not discount