Do Honest Retailers Offer Better Investment Returns?

Every year, Forbes collaborates with GMI Ratings to develop a list of the 50 Most Trustworthy Companies in America. The company with the highest Aggressive Accounting and Governance Risk (AGR) score is considered the most trustworthy, and trustworthiness goes a long way toward outsized, long-term shareholder returns.

The three companies listed in the diversified retail category on GMI Ranking's list are: Dollar Tree (NASDAQ: DLTR  ) , Dillard's  (NYSE: DDS  ) , and PriceSmart (NASDAQ: PSMT  ) . Dollar Tree's AGR went from 70 to 91. Dillard's went from 78 to 91, and PriceSmart's actually decreased from 78 to 67, but it still made the list.

GMI also publishes a list of the 50 worst AGI scores -- it is called the Risk 50 List. The only two companies in the retail category were Groupon, Inc. (NASDAQ: GRPN  ) , and Urban Outfitters (NASDAQ: URBN  ) .

Trustworthiness and price performance
While corporate risk is important for investors, it may not have the same value as trust in brand from a growth or margin perspective, but perhaps the two are connected. If they are, we should be able to see some correlation between the most trustworthy retail companies and price performance.

The chart below shows that the most trustworthy companies are priced higher in terms of price. What's even more interesting is that all five of these retail companies were trading at around the same level until 2011. Since then, Dollar Tree has been in a holding pattern along with Urban Outfitters, and PriceSmart and Dillard's have been fighting for the top spot for the past three years. Groupon, on the other hand, started out as a great idea before investors realized how shallow its moat was.

PSMT Chart

One-year share price returns show a different story, however. The chart below shows that even though Groupon is on the 50 most "untrustworthy" list, it actually has the highest one-year price return, followed by PriceSmart and Dillard's. Groupon may be an anomaly, but it seemingly contradicts the theory that price return, at least on a short-term basis, has anything to do with trustworthiness in the world of business.

DLTR 1 Year Price Returns Chart

When price is misaligned with earnings, there may also be an opportunity for a value-based investment. The chart below mimics the price chart above. The most trustworthy companies -- Dillard's and PriceSmart -- also appear to generate the highest earnings per share. In this instance at least, trustworthiness may also be a mark of higher earnings performance.

PSMT EPS Diluted (TTM) Chart

Takeaway
Trust is a hard attribute to measure, but it can affect sales in very measurable ways once lost. This analysis is hardly scientific, but it does suggest that:

  • Trustworthy retail companies have better earnings performance (Dillard's and PriceSmart).
  • Trustworthiness and price returns don't have a predictable relationship (Groupon).

Now it's down to two companies: Dillard's and PriceSmart. Dillard's has the highest AGR over the past two years, and the highest earnings per share. It also has the second highest stock price, just behind PriceSmart -- perhaps this little analysis is also pointing out that PriceSmart is overbought.

AGR isn't the only thing that's falling for PriceSmart; same-store sales have dropped consistently over the past 12 months, and it has a P/E ratio of 36 times, much higher than its peers at 18 times. In the video below, Fool contributor Brian Stoffel provides some specific same-store sales levels to look for in the April 9 earnings report. If PriceSmart misses on any of these expectations, it may be the start of a downtrend. Dillard's, on the other hand, has a P/E of 13 times, and its AGR is rising. It also reported a record-setting fiscal year 2013 with a $6.99 EPS.

The GMI Ratings report may not be the best indicator of price performance, but from a value perspective, it could suggest Dillard's is the better investment over PriceSmart or Groupon.

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