What are we looking for?
Companies in the retail industry that are growing revenue and gross profit margins while efficiently managing their inventory and costs.
The screen
With recent increases in M&A activity in this industry – for example, last week's $2.16-billion (U.S.) acquisition of women's retailer Ann Taylor by Lane Bryant's parent company Ascena Retail Group – I wanted to take a closer look at metrics that are positive signals for retail stocks.
I screened for billion-dollar-plus companies who grew their revenue in the last year and increased their gross profits by 5 per cent or more, on average, in the past three years. These metrics strongly suggest that the retailers were able to sell their goods at high prices as opposed to relying on sales and clearances.
Inventory turnover ratio is an efficiency metric that indicates how well a company has sold and replaced inventory over a given period; the screen was set to identify companies with a ratio that was greater than that of 12 months ago. Sales, general and administrative (SG&A) are the indirect costs of selling a product such as marketing, advertising, sales commissions and various other expenses. I looked for companies where the ratio of SG&A to revenue is less than it was one year ago, which means that they were able to cut costs while still growing their revenue.
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What did we find?
Many of the companies listed have stores located in local malls and shopping centres. The average investor has the ability to visit these retailers and look at the quality and cost of merchandise, the foot traffic in the store and if shoppers are leaving with bags or empty handed.
For example, Canadian Tire Corp. Ltd. has been refurbishing and rebranding their various stores over the past five years; in that span the shares have gone up over 160 per cent. Paris-listed Hermès International SA, maker of the $10,000 Birkin handbag, has net profit margins of more than 20 per cent, which is double the industry median. Their ability to raise prices and keep supply low has built the company's reputation for having the most exclusive and sought after luxury goods.
Readers should conduct their own research before investing.
Charles Martin, CFA, works in the financial and risk unit of Thomson Reuters and specializes in asset management.