The conventional wisdom on retailing and clothing is that it's nearly impossible to gain a sustainable edge. As such, there is a large number of people who simply will not put their money into a clothing retailer, period. This is a phenomenal mistake. Not so much because the thesis isn't true -- because, by and large, it is. But "by and large" does not mean that no retailer can succeed over the long or intermediate terms, and it certainly doesn't mean that there are no opportunities in retail investing.
One of my favorite Motley Fool discussion board members focuses almost exclusively on retailing, and has done extremely well. His thesis is clear-cut: Retailing is one of the easiest business segments for the individual investor to understand. The transactions don't tend to be complicated, everyone has some experience with clothing (we hope!), and many people have some knowledge about which companies are doing well, and which are not.
Ever go to the mall and see that kids were pouring into (and out of) Abercrombie & Fitch (NYSE:ANF)? That's not necessarily enough information to determine whether it would be a good investment, but it's not a bad place to start. And a deserted shop at the mall is not likely to be a good harbinger, ever.
Some of the best investments of the last decade have come from retailing. And we're not talking about the Wal-Mart (NYSE:WMT) and Costco (NASDAQ:COST) kind of retailing, though both of these companies have been spectacular performers. Claire's (NYSE:CLE) made its mark offering fashion accessories to pre-teens, Hot Topic (NASDAQ:HOTT) by focusing on "music-influenced" apparel. You needn't like or even wear the stuff to recognize its popularity.
For Stocks 2004, LouAnn Lofton found a retailer by paying attention to her mom and her tastes. This chain focuses on providing fashions for middle-aged women -- roughly 35- to 55-year-olds. It currently has about 400 stores, largely concentrated within two states, but has aggressively sought to expand into other markets. That's a great opportunity for investors. You'd much rather find a company that has addressed just 20% of its potential market rather than one that already has expanded into 80% of its market.
The demographic we're looking at here is highly coveted. TJX (NYSE:TJX) lives and breathes serving this group, for example, even though its offerings span much wider. So a retail company must remain careful, aggressive, and clever at the same time to have much impact.
This company's efforts to develop loyal customers is phenomenal, and speaks of its ability to gain traction in new markets. It offers a membership program that gives loyal customers first crack at new inventory, special sales, and information about upcoming trends. The more customers spend over time, the better the deals they receive. That keeps folks coming back. Certainly it's a program that others will copy, but they'll have a difficult time prying this particular loyal base away from these shops.
It's still early in the year. Come take a look at some of the great ideas our crack analysts have come up with in Stocks 2004.
Bill Mann is the editor of Stocks 2004 . He owns none of the companies mentioned in this story.
