What are we looking for?
The term "Black Friday" was first used in 1869 when two speculators tried to corner the gold market on the NYSE. When the government stepped in to correct the situation, many sizable fortunes were lost.
Today the term denotes the busiest U.S. shopping day of the year. According to Bloomberg, total Black Friday sales in the United States actually dropped 11 per cent in 2014 from 2013. Online sales, however, set new records and for the first time ever mobile traffic outpaced PC traffic.
Since Black Friday is fast approaching, my colleague Sean Pugliese and I thought we would take a look at the U.S. retail sector.
The screen
We started with companies over $1-billion (U.S.) in market capitalization and sorted them according to size.
- EV/EBITDA (enterprise value divided by the earnings before interest, taxes, depreciation and amortization) is a value ratio that looks at a firm the way a potential acquirer would, because it includes debt. A low number is preferred.
- The companies all had to have positive one-year sales growth, and positive one-year earnings per share (EPS) growth.
- Operating profit margin is a measurement of what portion of a company’s revenue is left over after paying for variable costs such as wages and inventory. If a company has an operating profit margin of 5 per cent, it means that it makes 5 cents before interest and taxes for every dollar of sales. All those on the list had to have an operating margin of greater than 4 per cent.
- Inventory turnover is a ratio showing how many times a company’s inventory is sold and replaced over the past 12 months. A low turnover implies poor sales.
- Return on assets (ROA) is an indicator showing how profitable a company is relative to its total assets. It gives an idea as to how efficient management is at using those assets, and a high number is preferred.
- Return on equity (ROE) shows whether a company is a profit creator or a profit burner. All those on the list had to have an ROE greater than 10 per cent.
What did we find?
Two companies scored better than the averages in five of the seven categories. Carter's Inc. is a major marketer in the United States and Canada for apparel and related products for babies and young children. Skechers, based in Manhattan Beach, Calif., develops and markets a diverse range of footwear that is available in more than 120 countries.
Investors should do further research or contact an investment professional before buying any of the companies mentioned here.
Michael Bowman is a portfolio manager at Hamilton-based Wickham Investment Counsel Inc., an adviser to high-net-worth clients.