Financial headline writers never tire of predicting the success or doom of the entire retail industry based on the most recent data. A couple months back, we were told not to pony up for retail stocks because gas prices, hurricanes, and maybe tummy aches were going to keep American wallets stuffed firmly in American back pockets. Some of us thought that was bunk (as we often do) and said as much. Since their October lows, bashed-up retail stocks such as Fool favorite Chico's FAS (NYSE:CHS) and Abercrombie & Fitch (NYSE:ANF) have come back with nice gains. Even the big boxes such as Target (NYSE:TGT) and Wal-Mart (NYSE:WMT) have outrun the wider market over the same period. And -- surprise, surprise -- the same crowd that was predicting doom is now telling investors to look forward to a jolly holiday season.
This isn't just an occasion to stick our -- OK, my -- Foolish tongue out at the rest of the knee-jerk financial press. Heck, I could just as easily have been wrong about that call. It's more a reminder of the merits of our approach to investing, the one that links seemingly diverse philosophies such as the conservative Inside Value and aggressive Rule Breakers -- buying quality businesses most often leads to good things for investors, no matter what the short-term navel-starers say.
That's why most of us here at the Fool are advocates of forgetting the forest and looking at trees, which is a fancy way of saying that we usually don't get into sector or industry bets. Instead, we tend to look at the merits of individual companies. That said, it sometimes pays to step back and get a little more perspective, to try and figure out exactly what kind of forest you're wandering.
In a dark wood wandering
When you scan as many companies as we do, you start to get inklings, instinctive feelings, gut reactions. Call them hypotheses, if it makes you feel more secure. Over the past year, I've had the growing feeling that when it comes to sales, luxury or high-end retailers seemed to be significantly outperforming their more traditional, lower-end peers. Sales at Coach (NYSE:COH)? Amazing. Sales at Kmart (NASDAQ:KMRT)? Not so much. You may argue, with good cause, that it's unfair to compare a specialty retailer to a large discount chain. Luckily for us, there are department stores such as Neiman Marcus (NYSE:NMG.a) and Nordstrom (NYSE:JWN) that permit a fairer, if not completely fair, comparison.
What follows is a quick exploration of that hypothesis -- with results that surprised me. Let me say from the beginning that it is not a scientific sample. (One of the benefits of writing for the Fool instead of the Journal of Incredibly Boring Statistics is that we can look at what we like.) These are simply well-known retailers drawn from the higher and lower ends of the retail spectrum.
The numbers
|
Bling Bling |
1-year |
Peer |
Same-Store Sales Change |
|---|---|---|---|
| Chico's | 44.7% | 6.1% | 13% |
| Coach | 38.6% | 0.4% | 16.9%* |
| Neiman Marcus | 14.4% | 6.1% | 14.2%** |
| Nordstrom | 8.6% | 6.1% | 9.5% |
| Saks (high-end)*** | 13.6% | 6.1% | 11.9% |
| Tiffany | 17.2% | 8.2% | 11% |
** Because of its reporting schedule, Neiman Marcus' comps growth is for the prior fiscal year ended July 31. The firm's October 2004 comps came in at 13.6%.
***Represents only the sales at Saks' higher-end Saks Fifth Avenue stores.
| Bargain Bin |
1-year |
Peer |
Same-Store Sales Change |
|---|---|---|---|
| Federated Department Stores | -1.1% | 3.8% | 3.4% |
| Kmart | -20.8% | 3.8% | -13.9% |
| May Department Stores | -1.1% | 3.8% | -0.8% |
| Saks (low-end)* | 2.4% | 3.8% | 1.8% |
| Sears | -0.6% | 3.8% | -2.1% |
| Target | 9.7% | 3.8% | 5.2% |
| Wal-Mart | 11.7% | 3.8% | 3.1% |
What does it all mean?
It's tempting to just end the article with those tables and let readers draw their own conclusions, because those numbers may mean nothing. But I suspect otherwise.
To judge by this sample, higher-end retailers are outselling their lower-end peers by a significant margin. Overall sales growth provides the most stunning comparison, with only Target and Wal-Mart performing on par with our luxury group. Of course, you don't want to be fooled by the sky-high numbers at fast-growing firms such as Chico's. Those sales gains are juiced by a very quick pace of store openings, whereas a firm such as Kmart has an overly grim sales picture because it's been closing stores in order to concentrate on more profitable locations -- not to mention auction off the resulting pile of vacant real estate.
That's where the comps column comes in. The percentages here measure sales gains only at comparable or "same" stores. Generally speaking, that means stores that have been open a year or so. This is an attempt to quantify how well existing stores are increasing their revenues, and it's an important measure of whether sales are increasing only through expensive capital expenditures.
As you can see, the comparisons here are none too flattering either, especially for market darling Kmart. Despite some moves that have drawn praise from Fool Rick Munarriz, Kmart's existing stores are moving less and less merchandise. That's not a good thing. On the other hand, the bling bling group's comparable store sales are nearly all in the double digits. When Nordstrom's near-10% is the bottom of the bunch, it looks like we're dealing with a pretty substantial trend.
Most telling to me is the situation at Saks. The firm's high-end stores are doing a much better job of selling than its low-end stores. Because the same company is running both branches of the enterprise, it's a little tougher to make the argument here that you could make with the other companies in the tables -- that top-line differences are owed only to better management at the luxury stores.
The Foolish bottom line
Keep in mind that one measuring stick does not an investment thesis make. Kmart, the worst sales performer in the group, has been the best stock to own this year, hands down. But sales, especially comps, are a vital indicator of the health of a retailing business. Though other developments, such as asset sales and mergers, can move stocks in the short term, when it comes down to it, stores need to sell. (That's the reason that one waggish analyst compared the recently announced merger of slow-selling Sears and Kmart to a pair of drunks tied together, hoping that will keep them on the straight path.)
On the other hand, if shoppers' appetites for luxury and specialty goods are indeed growing more quickly than consumption of basic, department-store goods, investors should pay attention to the trend when choosing prospective tickers for their portfolios. As an added bonus, the luxury, specialty, and high-end department stores listed here generally enjoy much better margins than their bargain counterparts, meaning that accelerating sales ought to have an even more impressive payoff on the bottom line.
For related Foolishness:
- Do two anchors float any better than one?
- Tiffany tells it like it is.
- Ponder the retail rebound.
- Is Kmart a retailer or a land baron?
Seth Jayson finds retail fascinating, probably because he spends so little time shopping himself. At the time of publication, he had long positions in Chico's but owned shares in no other company mentioned. View his stock holdings and Fool profile here. Fool rules are here.
