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Clothing Retailers


MCN
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Hi all,

 

I'm hoping to get some pointers from those with experience of researching and investing in retailers, particularly clothing retailers.

 

Would be great to hear your war stories, mistakes, screw ups when analysing these type of companies.

 

What issues do I need to be aware of, accounting red flags to look out for etc....

 

And what is the most appropriate way to compare retailer performance against the competition. Some obvious ones I'm using are same store sales, Sales/ M2, Costs/ M2 etc

 

 

Help avoiding typical rookie mistakes would be much appreciated! :)

 

Many thanks!

 

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I once owned shares in Aeropostale. I liked the balance sheet, it had a good amount of cash and no debt (though I didn't account for operating leases). Based on the earnings, net of cash, it was pretty cheap.

 

Luckily, I broke even. I think I sold to get into BAC in 2011 or something.

 

What I learned is that the customers are very fickle, there is a lot of competition, and they need to update their offerings very frequently. This makes for a very tough business to be in.

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Retail seems to be heavily dependent on management. 

Aeropostale tanked after the new CEO (formerly co-CEOs) came in.

JC Penney got Ron Johnsoned.

 

One of the retailers Buffett purchased did poorly after the CEO left.  Then there was Nebraska Furniture Mart, which did poorly when Rose Blumkin left to set up a competing store across the street.

 

The other reason retailers do poorly is due to some type of secular change outside their control.  Mainly all of the retailers getting killed by Amazon (e.g. bookstores).

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Here's an easy lesson, right here on this thread. Pull up the charts since the date of the class for the three retailers Diana Greenblatt talked about in that link. (American Eagle, Abercrombie, Aeropostale.)

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I think the lesson with Abercrombie was that other retailers started to copy them. in 2007 that was all fine, because there was enough disposable income. But when disposable income fell away  the stock got crushed. Seems like clothing retailers mostly rely on being a fad.

 

Anytime you own shares in company that gets its business from disposable income, you have to be really carefull. They are not very recession proof, unless their moat is rock solid. Clothing is one of the first things to go in the pyramid of disposable income.

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I've invested in 3 retailers in the last few years. 2 of those retailers are ones that I personally like and shop at. They also offered something unique that I couldn't get elsewhere and I paid a premium for their clothes. 1 of the retailers is one I shopped at but didn't really like it and soon switched to a competitor due to better service.

 

I about doubled my money on two of them and lost money on one. No prizes for guessing which one lost me money :)

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Here's an easy lesson, right here on this thread. Pull up the charts since the date of the class for the three retailers Diana Greenblatt talked about in that link. (American Eagle, Abercrombie, Aeropostale.)

 

What is the lesson?

 

They're all in trouble. The whole class of "teen retail" has been swamped with heavy, smart, fast competition. Those three were the class of the industry not ten years ago. I hope we can draw many lessons from that.

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