Three retailers are battling it out, which one would reign supreme?
Looking at three retailers at three drastically different share price points to see which one is worthy of a spot in our watchlist and ultimately will find its way into our long-term portfolios.
This is the second edition of watchlist-worthy battles. Last week, we looked at three car companies — Volkswagen, Geely, and Ferrari and chose the one that we believe has the most potential to generate wealth for its investors. If you haven’t read last week’s edition, you can read it on our blog.
Let’s get to know today’s contestants:
All numbers stated are based on the last available data on 8/24/2018. If you are reading this edition at a later date, the information might be drastically different. Be smart and check your numbers.
$ Target (Price to Earnings ratio: 15.26)
Target is such a surprising company. A few years ago, most people thought the company will go bankrupt while trying to compete with Amazon and Walmart. I remember, in 2014, the CEO of Target had to resign after there was a massive data breach and millions of Target customers’ credit card information was stolen. The company had a lot of long-term debt and had you invested in its shares in the past decade, you would have lost to the average return of the market. Fast forward to the latest quarterly earnings call, the company is thriving. Under the management of the new CEO, Brian Cornell, same-store sales are at the highest-ever level. If you are new to investing, scroll all the way down to the “How to Invest section” to learn about the same-store sales definition and why it matters. Back to Target’s latest quarterly earnings, the stock price is on the rise, and it appears that despite all odds, the company is growing and you can invest in Target on the cheap!
$$ Walmart Inc. (Price to Earnings ratio: 54.5)
By revenue, Walmart is still the largest company on earth. There is so much talk about Amazon and online retailing that it is easy to forget that. Just like Target, many investors would have never thought we still consider investing in Walmart in 2018. Recently, the company took the lead in India’s eCommerce market and purchased a majority stake in Flipkart — India’s #1 eCommerce player. Add the acquisition of Jet.com and a few other eCommerce companies, and it is no doubt that Walmart is, rightfully so, focusing on getting ahead of Amazon in a market where eCommerce hasn’t found a strong foothold yet. The company is also being innovative. The initiatives such as ‘buy online’ and ‘pick up at the store’ are paying off so much so that Amazon has recently announced it is replicating the in-store digital order pick up option at its Wholefoods locations. Talk about how tables are turning! However, the growth for Walmart is coming at the expense of profitability margin. For Walmart to continue its growth, it still has to spend significantly on marketing and customer experience which means even lower margin. Lastly, at 54.6 price to earnings ratio, Walmart’s stock is not even cheap compared to the average P/E ratio of the S&P 500.
$$$ Stitch Fix Inc. (Price to Earnings ratio: without trailing 12-month earnings, at any price, it is extremely expensive)
If I wanted to make an investment decision based on my personal taste, I would have invested thousands of dollars in Stitch Fix. From the excitement of receiving your subscription-based clothing box, to the happiness of going through and trying the outfits that your stylist has personally picked up for you, to a cool, Harvard-graduate female CEO who owns more than 17% of the company, everything about Stitch Fix exudes coolness! Dope! But, then let me come down and land back on earth. Stitch Fix only went public in November 2017. As is the case with all recent IPOs, there is less data available for investors to analyze and decide whether the company would grow in the future. It is a small company that is rapidly growing, and as is the case for most recent IPOs, the company is spending all its cash on growth and nothing is left at the bottom of the pot for shareholders to stick their teeth in. With no consistent trailing 12-month earnings, technically speaking, any price you pay for Stitch Fix’s stock is considered too expensive.
Which is our watchlist-worthy pick?
Target was the cheapest, Walmart is in the middle, and Stitch Fix is the new retailer on the block that mathematically speaking is the most expensive stock of the bunch. All three companies are doing so well, that almost all three deserve a spot. Walmart is going to stick around for quite a long time. The company has no significant debt, generates free cash flow, and has enough money to spend to stay competitive in the market. Target, on the other hand, is a bit of a double-edged sword. It is growing, but that huge debt is still a burden. If we get to a situation where the interest rates go up, financing the growth of the company would become an issue, as the company may not be able to fund it without paying large amounts as interest. Because I have to choose just one winner, my watchlist-worthy winner is Stitch Fix. Only because, the growth opportunity is tremendous. The subscription-based, personalized retail market is a new market category that is growing dramatically. The company is not just a retailer but relies on deep analytics and personalization capabilities to keep its customers happy. At slightly lower than $4 Billion in market cap, the size of the company is so small that relative to the overall retail market, there is just so much opportunity left. One thing I have to say though, despite all the love I have for the company, I actually stopped my subscription for Stitch Fix. After a while, the novelty of opening the box and seeing the goodies inside fades away, and then you ask, why am I paying a bit more for clothing? So, the reason I’m adding Stitch Fix to my watchlist and not investing in it just yet is because I want to see their churn rate. I’m not sure how many people are like me, but when the company attains a significant number of customers, the question would be, for how long would these customers keep their subscription. While I may lose a chance to grow my investment with Stitch Fix in the next few quarters, I’d rather wait and see how well they keep their customers subscribed before I make a long-term investment in the company.
Let me know in the comment section which one is your watchlist-worthy winner?
What is same-store sales and why does it matter?
Per Investopedia.com, same-store sales statistics provide a performance comparison for the established stores of a retail chain over a given time period. The ratio is calculated by dividing the current stock price by the current earnings per share. Earnings per share are calculated by dividing the earnings for the past 12 months by the number of common shares outstanding. Same-store sales figures are important points of analysis for the management of a retail chain and for investors evaluating the chain’s current and likely future performance.
Tip: If you have a retail store that is growing but the same-store sales are not growing, you have to be a bit cautious. As soon as the company stops opening new stores, growth will stop and you’ll end up with a retailer that cannot grow in its current market.