[quote user=gwasser]Just spending a view minutes on-line and noticed the discussion on retail stocks, in particular smaller cap retail stocks.
The financial numbers of such stocks may seem to be good, but their small size also makes them higher risk. I do not necessarily mean their price volatility, although that can be considerable too. I mean financial risk especially when combined with the sensitivity of their sales and profit margins during the business cycle.
Hi Godfried, as always I appreciate your insights. You are correct that their margins are not as consistent as other industries. However, this is not to say that they are not consistent.
I like businesses that sell aspirational goods because of my cynical view that most of society will have a need to display their ego whether it's the clothes and watches they wear, cars they drive, and/or homes they live in. This makes their returns on equity to be healthy. Fossil's returns on shareholder equity have ranged from +14% to +20% over the last decade. The Buckle has ranged from +12% to +38%. K-Swiss has ranged from -25% to +35%. American Eagle has ranged from +10% to +25%. Columbia Sportswear has ranged from +7% to +30%.
For me, these wide swings make it very easy to pick a spot to buy. Businesses with tighter numbers are harder for me to make money with (ie. Berkshire Hathaway).
[quote user=gwasser]In my books, retail stocks are highly competitve, low margin businesses. This may be slightly different for 'status' retailers but as soon as the latter reach the size of a Birks or Renfrew there is no market left and they will have to cater to the masses. Their margins consequently will go down.
Fair enough. However, all businesses will face margin pressures as they get bigger. In addition, all businesses will face strong competition if they are successful. That's just life.
I focus only on businesses in the $500M to $2B range since it gives them a lot of room to grow. I discovered Fossil when it was a small $500M business.
It is also relatively safe to say that even thin margins can be wildly profitable if debt-free returns on equity are strong.
[quote user=gwasser]I used to own Danier Leather - well managed very experienced retailers. But in the down turns and with changing seasons (winter, spring, etc.) just hold onto your seat. That you buy them during market downturns is smart. Holding on to them after they reached a decent profit level is more dangerous. What is the upside and how much risk are you running when (not if) things go south?
I can't comment on Danier Leather because I am unfamiliar with their financials. I also want the businesses that I invest in to have large shareholders involved; preferably as the CEO. This way, I have a better chance that management will do what is in the best interest of myself and other shareholders as opposed to simply maximizing their compensation. I don't believe that Danier Leather has a strong insider shareholder presence.
[quote user=gwasser]Overall, I am a long term investor and one that likes to buy (at the right price) and then hold and collect dividends for a long time until the company loses its way or becomes significantly overpriced in the market. Thus in my books these retail investments are high risk and provide modest reward because who can predict fashion and who can predict market behavior especially in the short time windows that these retail stocks peak?
Good points and I appreciate that you are willing to share your perspective. It appears that both you and I are long term investors although I may not have been at it as long as you have
For me, retail investments has been an easy way to experience very satisfying returns with minimal risk. Of the dozen stocks that I have bought in my brief investing life, I have only lost money with one stock; that's seems to be a half-decent record.
Speaking for myself, I only sell if I need the money or if the number of insider shareholders declines significantly.
With regards to dividends it would be ideal for me if the business doesn't distribute any.
I also don't care if the company becomes overpriced in the market nor do I believe that it is my role as an investor to try to predict fashion trends.
As an investor I seek to identify owner operated, debt-free businesses that have shown a history of good profitability and returns on shareholder equity. Once identified, I wait until bad news fills the media and everybody tells me that I'm crazy to be buying.
Best regards and thanks for reading!
