I hate shopping. Because my mom and aunt forced me to go with them on their shopping marathons when I was a kid, my version of hell is endlessly circling a crowded mall parking lot looking for an open space. But my aversion to shopping doesn't mean I stay unaware of retail trends.
There's simply too much money to be made in the industry.
So I go to the mall to see who is buying what. Try it for yourself the next time you're there. You'll undoubtedly see the fruits of some of the market's biggest success stories -- moms drinking Starbucks coffee, guys listening to their Apple (NASDAQ:AAPL) iPods, girls toting their Coach (NYSE:COH) bags. It's capitalism at its finest. These stocks are up 230%, 320%, and 450%, respectively, over the past five years.
My brush with greatness
But the key to successful mall investing is to find the next trend before it hits. Back in December 2003, for example, I happened upon Urban Outfitters (NASDAQ:URBN) and saw all the signs of a potential home run stock. (In fact, the company was already in the midst of a meteoric rise.)
The store was packed with teens and 20-somethings more than willing to pay top dollar for the same kind of "vintage" clothing I could find in my parents' attic. Talk about an opportunity for good margins! Any store that can get men to pay $30 for a T-shirt with a beer logo clearly has hit a sweet spot.
Unfortunately, I didn't act on my findings. If I had, I'd have nearly doubled my investment by now -- and that's after the sharp downturn the stock has taken over the past few months.
Coming soon to a mall near you
The reason there's so much money to be made in retail is that consumer spending makes up two-thirds of our country's $11 trillion gross domestic product. I wasn't all that surprised then when I saw that four of the 10 best stocks of the past 10 years were clothing retailers.
What made Chico's (NYSE:CHS) and American Eagle (NASDAQ:AEOS) as well as Urban Outfitters and even Abercrombie & Fitch (NYSE:ANF) -- successful? Each one:
- Expanded efficiently
- Increased profit margins
- Was small
This formula has worked well for investors:
|
Store Expansion Rate* |
EBIT Margin 1998 |
EBIT Margin 2006 |
Price Appreciation* | |
|---|---|---|---|---|
|
Urban Outfitters |
21.9% |
12.7% |
19.0% |
35.5% |
|
Abercrombie & Fitch |
23.3% |
16.1% |
19.5% |
20.3% |
|
American Eagle Outfitters |
12.7% |
8.1% |
20.1% |
32.7% |
|
Chico's FAS |
23.7% |
6.5% |
21.2% |
80.1% |
While these stocks have dropped (Chico's nearly 50%) along with the rest of the market over the past six months, their losses illustrate the inherent risk-reward trade-off that comes from investing in retail. These companies rely not only on the state of the economy but also on their ability to keep up with fashion trends. If you can stomach the volatility, however, small retailers with promising financials can make for very rewarding investments.
Now if you can't make it to the mall yourself, at least talk to a shopaholic. One of legendary investor Peter Lynch's best investment ideas came from his wife. As the now-well-known story goes (I'll repeat it anyway), she came home one day and told him how much she liked Hanes L'eggs pantyhose, a product now owned by Sara Lee (NYSE:SLE). Long story short, Lynch did his due diligence, researched the small company, liked what he saw, made an investment, and the stock increased sixfold for his FideltyMagellan fund.
The next big kahuna
The trick to earning great returns from retail is finding your retailer before the rest of the market does. Our Motley Fool Hidden Gems newsletter is dedicated to that very concept. Fool co-founder Tom Gardner and his team look for small caps with good management, conservative accounting practices, and dominant positioning in a profitable niche. And yes, there are some retailers on the list -- including two that Tom thinks are poised to benefit greatly from the growth of alternative sports such as surfing, skating, and snowboarding.
Poppycock, you say? It's impossible to beat the market? Click here to give our Hidden Gems newsletter a whirl free for 30 days and see what you think. No strings attached.
Todd Wenning owns shares of Starbucks and is addicted to its lemon-ice pound cakes. Starbucks and American Eagle are Stock Advisor picks. Sara Lee is an Income Investor pick. The Motley Fool has adisclosure policy.
