Are you shopping stocks ?

My previous video post “Selection by Rejection” was inspired from the learnings in “Beating the Street” by Peter Lynch

Shopping stocks

Why retail stocks ?

  1. Easy to understand business
  2. You can wait for business to prosper before jumping the gun and buying. I will give you an example

Go watch this

From 1962 to 2010 Walmart opened – 0 to 4393 stores

Now Walmart was and is an exceptional company, however the point is people could have invested in Walmart in 1972,1982,1992 or even 1995 and still would have made multi bagger returns. See the chart below showing returns from as late as 1995

The stock has been a six bagger in last 19 years , even after story being completely known across internationally and I am discounting the huge dividends it pays each year

Shopping stocks

Where to find these stocks ?

The best place to go for shopping stocks especially retail stocks would be your nearest shopping mall. Many of the biggest gainers come from the places that millions of consumer visit all the times. Given this was not possible for me I started with BSE website and list of companies listed on BSE. I was able to find 12 stocks listed in departmental stores category

Shopping stocks

How to select stocks for detailed study ?

The technique that I followed was selection by rejection, before digging deep in these companies, These were the factors I used

Avoid small cap companies – While they may be fantastic companies however they have not proven their model yet and I am uncomfortable to hold companies less than INR 50 Cr Market cap

Caution Note : Before progressing quickly check their annual sales, if it more than INR 100 Cr than pause and include them in your next stage verification

3 companies out 12 were rejected out of list, however since I am intending to do this exercise on an yearly basis, chances are that some of them would have prospered and I can look into them in detail later

Next avoid companies with a debt to equity ratio of greater than 1 – High debt has been peril of many promising departmental stores business. Do you remember the fast growing Subhiksha grocery stores, a hyper fast expansion on debt steroid brought its downfall. You can read the entire case here

In case your are interested in a paid case study see this

When I applied debt to equity ratio 4 out of 9 companies had debt to equity of more than 1 and they could not made it to next stage

Next avoid companies with high inventory days – The ICMR research on Subhiksha pointed out supply chain issues

Subhiksha claimed that the financial problem was due to its inability to raise enough equity capital, analysts opined that the fact that the retailer rapidly expanded during the last three years and its poor supply chain management practices had contributed to its financial woes

Retailers who are not able to sell their goods fast enough will tend to pile up inventory, One of the best ratios to monitor for a retail company would be how are they doing with their inventory days. When I looked at inventory days of the 5 remaining companies 2 of them had inventory days of more than 100 days. These two could not progress to subsequent stage

Avoid companies having a very low ROE – Low ROE indicates that the company has not been able to provide adequate returns to its shareholders, to avoid data anomaly I used last three years average. Out of 3 companies 2 have been earnings low or negative ROE for last three years

That meant I was left with just one company

Finally I was happy I had arrived at least one company that I could study in detail – Store One Retail India Limited

I jumped to their website to download last few annual reports, Little that I knew it was an India bulls company. I am not comfortable with the promoters so my 30 minute research to find the next ten bagger in retail ended 🙂

However I would repeat my process every year, there would be companies who would have

  • Proved their model widely
  • Reduced debt
  • Improved their supply chain

Once you find a retail operation use below to do in-depth study of operations , First two are directly reported in Annual reports and next two have to be derived with some estimates

Same-Store Sales: This metric measures how one particular store, or a group of locations, have performed on a period-to-period basis.

Sales per Square Foot: This metric measures the average revenue generated for every square foot of retail space.

Rent per Square Foot: This metric measures the average rent paid for every square foot of retail space.

Profit per Square Foot: This metric measures the average profit generated for every square foot of retail space.

Gross Margin: This metric measures just how much gross profit a company retains for every rupee of revenue that it generates

Inventory Turnover: This metric measures how many times a retailer is able to sell and replace its inventory over a certain period

 

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