When investing in retail-related companies, there are several aspects of their business that you as an investor should be aware of. Like in any business, there are good retailers and bad retailers. Because of the large number of retailers consumers have to choose from, a retailer's management is just as important, if not more important, than the products they sell. Here are several steps you should take in account before investing in retail.
First, you should visit the stores the company owns. This helps you become familiar with the products they are selling and the types of customers they cater to. It also gives to a sense of how much they charge based on their competition, how clean and well lit the stores are, and how do their employees treat you. After accumulating this information, you should ask yourself if this is a store you feel comfortable being in and feel comfortable being seen in. Remember that perception is everything with some people and if you go into a Walmart or Target and don't feel comfortable than chances are you're not the only one. Other aspects you should look at when visiting a store are the displays, the promotional offers, and are their products in stock or do they have a lot of empty shelves.
Next, there are some technical analysis and information you need to be aware of. This information includes the store's sales-per-square-foot data, inventory turnover, and same-store-sales data. A store's sales-per-square-foot gives investors an idea of how well management is utilizing the space they have to work with. An example of a store with very good sales-per-square-foot is Walmart. They typically announce on their quarterly earnings conference call that their sales-per-square-foot is around $400. This means they produce $400 worth of sales for every square-foot of space in the store.
Next, a store's inventory turnover is important because this information gives investors an idea of how quickly they are selling their inventory. Typically, the shorter the inventory turnover rate, the better the sales. However, this number also depends on the seasonality of the business and therefore should not be the only metric used to determine the quality of the retailer.
Lastly, a retailer's same-store-sales data is a very important piece of information. This information tells investors how existing stores sales compare to last years numbers. It is important to see growth in this area because that lets investors know that consumers are receptive to what the stores are selling. However, if this number is decelerating that gives investors the idea that this retailer is not healthy and that their competition is gaining market share.
Investing in retail seems like a safe bet, but it is more complicated than most people realize. Most companies have such a large number of competitors that it is important that same-store-sales numbers show consistent growth and that retailers adjust to changes in consumer spending trends and styles. If retailers do not keep up-to-date with what consumers are looking to buy, then it is easy for them to fall out of favor with consumers and see dramatic declines in their earnings and share price.
