Your simple guide to researching a retailer for

Investment purposes

First the basics A retail business must have these essential ingredients:

Next, we spot the margins

What margins?

The margins that determines a retailer’s future in the marketplace. There’re two such margins:

Important margins

They tell us these things: Gross margins – able to source goods below the price. Profit margins – able to source goods and pay for all other operating expenses like distribution, selling, keeping the lights on and salaries below the selling price.

Looking at the Balance Sheet

For retailers, three things to keep an eye on:

First up, debt

WHEN DEBT IS GOOD ON RETAILER’S BALANCE SHEET:

1. Tangible assets exceeds its debts. 2. If you’re a start-up, but the business needs to be exciting

(look for social media chatter of this new start-up for possible success).

3. It is used to acquire new businesses that are compatible; drives cost-savings and cash-generative bought at a fair value.

WHEN DEBT IS BAD ON A RETAILER’S BALANCE SHEET:

1. If retailer borrowing year-after-year without making a cash profit.

2. A retailer has no asset-backing (most intangibles and goodwill) to pay-off the debt.

3. When interest costs exceed operating profit. 4. Buying businesses that don’t meet the retailer’s goals, and

produce no cash savings.

Why cash is king?

to prove business model is working.

Retailers needs

Retailers needs to return money to shareholders.

Retailers needs to re-invest in existing business and to grow its operations.

Assets, the source of retail success – part 1

Investors can be confused when it comes to judging the values of assets on a retailer’s balance sheet.

Why is that?

In retailer’s assets are valuable, even goodwill has value, as the acquired businesses generate cash.

But when business is retailer’s assets are not that valuable!!

Assets, the source of retail success – part 2

Which assets can you count on when times are bad for a retailer’s operations?

Assets, the source of retail success – part 3

Which assets will not be valuable when times are bad for a retailer’s operations?

Revenue recognition

A topic that novices don’t understand, unless they have experienced investing, or run a business.

So, why is revenue recognition important and what you should paid attention to?

When a transaction takes place the customer either pay by

OR

Both gets recorded as Sales.

Cash sales is recognised immediately, but credit sales is recorded as a trade receivable (under ‘current asset’) on the balance sheet.

As soon as the customer pays back the debt, then trade receivables get decreased, and the company’s cash balance increased by the same amount.

Sometimes, customers can’t pay back what it owes. Then the retailer is forced to it off as lost sales, or an expense in the Income Statement.

It means previous years sales were over-stated. How do investors guard against businesses reporting liberal sales?

Here are some general rules:

1. If Trade Receivables growth grows roughly the same as Sales growth then sales are good and sales write-off is kept to a minimal.

2. But if Trade Receivables growths exceeds Sales growth, year-after-year, then we should question if the company’s sales can be collected, or would it be written-off as ‘lost sales’ in the future.

Retailers selling durable goods like laptop, cars, washing machine, etc. needs to provide customers with a guarantee of a replacement over an agreed upon period.

That period can be two, three or five years.

But retailers are allowed to record products sold as sales, but it must record something in return and that something is known as a

A warranty for a retailer is a provision (under the current liability and non-current liability) on the balance sheet.

The company using its experience will estimate a percentage of sales that is likely to be replaced.

Therefore, the retailer will set aside a specific amount as provision to compensate for replacement.

After 2 years, the accounting rules are: 1. An increase in provision from the previous year means an expense

get recorded in Income Statement. 2. An decrease in provision from the previous year would contribute

to net profit.

When it comes to retailing it is important to be notice and be able to connect with people.

That is why retailer wants to built their own personal

The ‘brand’ is your friend

Brand retailers are retailers loved and admire the world over. Brands like Apple, Cola-coca and, Burberry stands out from the crowd. A brand retailer tell its goods and services because they’ve these characteristics:

STYLISH

TRENDING

Perform

And having a must have product wanted by consumers

Most retailers are distributors of famous brands

Retailers such as 1. Department stores, or big box stores; 2. Grocers like Wal-Mart and Tesco; 3. Online retailers like Amazon; 4. Electrical stores like Best Buy and Dixons; 5. Mobile phone retailers like Verizon and Vodafone.

Popular financial metrics for retailers

1. SALES, a measure of same stores sales opened for more than a year.

2. per tells us the average amount of goods purchased.

3. Average selling price per item (a metric use from non-food metric).

Popular non-financial metrics for retailers

The following non- financial metrics are used to measure retail efficiencies:

1. PER

2. Sale/ No of employees; - some companies provide statistic for ‘full-time’ equivalent employees.

3. PER

Popular non-financial metrics for retailers

4. Annual rent, electricity and utilities bills, as a % of sales

5. PER Follower

When researching, which retailer to invest in, we need to understand the importance of

TRENDS

The importance of trends Singular data is meaningless because it doesn’t tell the whole story of the performance of any company, and, in any sector, not just retail.

Identifying a retailer’s financial trends is studying its:

1. BUSINESS

2. MARGIN

3. PROFIT/STORE

The importance of trends

General rules

1. When cycles peak, the retailer tends to be overvalued.

2. When cycles trough, the retailer tends to be undervalued.

But, in reality business cycles can peak for a sustainable period of time, causing earnings to grow and reaches new peaks (CLICK TO TWEET)

When business cycles trough it can do so for a quick period, before growing again, or its in sustainable decline.

Examples of financial trends

These are some of the ratios used to identify a retailer peak cycle and trough cycle: 1. P/E ratio; 2. ROE, ROCE, operating margins and EBITDA margins; 3. Debt to equity ratio; 4. Revenue growth/contraction cycle (please excludes

discontinued operations); 5. Earnings yield;

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