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Top 3 Retailers for Customer Retention in 2013

By Dan Moskowitz - Dec 31, 2013 at 7:30PM

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The top three and bottom two companies on this list might surprise you. Invest accordingly.

If you ever have a chance to sit down with someone who runs (or has run) a successful business, be sure to take advantage of the opportunity. Even if you don't plan on running your own business, it will give you excellent perspective into what types of companies to invest in. One common piece of advice given by successful business owners is to avoid debt. Another common piece of advice, as well as what will be the focus here, is to focus on repeat business.

Growth is imperative, but it should be looked at as the gravy. If a company is always looking for new customers without focusing on its current customers, it will fail. Repeat customers are the backbone to a successful company. Not only do loyal customers account for the majority of revenue, but if those customers are happy, they will tell others about their positive experiences, which will then grow the top line.

With this being established, we will soon take a look at which retailers have retained the most customers for the past year. This survey is based on America's Research Group and Inmar. And the results might surprise you. Only 24 large retailers were included in the survey. But that's not important. What's important is that only three of these retailers have retained at least 70% of their customers from late last year, during the holiday shopping season. This is a concerning trend. However, it tells us that those three retailers are especially impressive. Let's see who they are. 

Top performer
The top performer doesn't come as a surprise. It's a retailer that I have been bullish on for years, despite so many people hating the company. Therefore, if you read this column, then you already know it's Wal-Mart Stores (WMT 0.22%).

According to the survey, Wal-Mart has retained 88.2% of the customers that it acquired late last year. This is an incredible number. There are several reasons for this.

One, while many people shop online and use, more people still prefer to visit a brick-and-mortar store. Since Wal-Mart is the largest retailer in the world while also offering everyday low prices, the impressive retention number is logical. Other potential catalysts include a lenient return policy (no receipt necessary in many cases), extremely broad product diversification, and an impressive food section including quality and often underrated produce.

No. 2 on the list, but potential danger ahead
Dollar Tree Stores (DLTR -0.20%) comes in second place, retaining an impressive 80.4% of the customers it acquired late last year. Dollar Tree is the only true dollar store of the big three, since it's the only dollar store that actually sells all of its items for $1. This reputation leads to impressive foot traffic, and it has led to the most top-line growth of the three over the past five years. 

In that time frame, Dollar Tree has seen top-line growth of 69%, Dollar General is close behind with 64.6% top-line growth, and Family Dollar is a distant third, seeing 44% top-line growth. However, Family Dollar is the only one to pay a dividend, currently yielding 1.6%.

The reason for concern, for all three dollar stores, is that Wal-Mart's Neighborhood Market and Wal-Mart Express are expanding, partially in an effort to steal back market share from the dollar stores. Wal-Mart is the clear favorite given its deep pockets and marketing power. However, dollar-store shoppers are very loyal to their brands, and it will be difficult for Wal-Mart to pry them away. It should be an interesting competition. As of right now, Dollar Tree is a clear winner, but keep an eye on Wal-Mart's advancement into Dollar Tree territory. 

No. 3 on the list, but expectations low
Target (TGT 4.59%), the once ideal value-shopping destination for all different types of consumers, is now dealing with a security breach that will lead to lost customer trust and steep costs for lawsuits and technological improvements. Therefore, despite the company's ability to retain 72.1% of the customers it acquired last year, I'm no longer bullish on Target, at least for now. It's going to take a long time for Target to win back the trust of its customers as well as to sift through all of the financial damage and constant distractions related to the breach, which should negatively impact upper-management's focus on other areas.

The bottom two
The worst performer of the bunch isn't a shocker, which is Barnes & Noble (BKS). It only managed to retain 43.9% of the customers it acquired last holiday shopping season. With all of the competition it faces in the physical and online world, Barnes & Noble has a very low chance of seeing sustainable growth in the future. The company's revenue has slid 4% over the past year, and it has a negative profit margin of 2.9%. These are worrisome numbers. 

The second-worst performer is a shocker, which is Costco Wholesale (COST 1.04%). It only retained 49.4% of the customers it acquired last holiday shopping season. Despite this being a very concerning number, I'm not very concerned. Costco enjoyed revenue growth of 3.2% over the past year. Though low, its profit margin of 1.9% is still in positive territory, and it's expected to be low given the business model. Costco also generated approximately $3.3 billion in operating cash flow in the past year. And it yields 1%. If there are any issues, Costco is capable of figuring out a solution. 

The takeaway
Try not to let the survey's results scare you off Costco. Just keep an eye on the company's results if you're already involved. Barnes & Noble's long-term potential appears to be poor, as is Target's near-term potential. Dollar Tree continues to grow, but competition is likely to increase. In my opinion, if you're looking for a long-term investment where you're likely to see slow and steady growth while receiving steady dividend payments, then Wal-Mart should be considered. 


Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Barnes & Noble and Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
$129.15 (0.22%) $0.28
Barnes & Noble, Inc. Stock Quote
Barnes & Noble, Inc.
Target Corporation Stock Quote
Target Corporation
$172.70 (4.59%) $7.58
Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
$541.42 (1.04%) $5.60
Dollar Tree, Inc. Stock Quote
Dollar Tree, Inc.
$168.62 (-0.20%) $0.33

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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