The Danger of Investing in Retail Stocks

by Lawrence Meyers | December 16, 2011 7:30 am

Any discussion of stocks with my father usually involves his pronouncement, “I don’t do retail.” He has plenty of good reasons why he won’t touch the sector, but the primary one has to do with its volatility. History has shown that retail clothing stocks can make one rich one minute, and put them in the poorhouse the next.

Much of the danger in retail lies in the fickleness of consumers. When sales of a given company’s products roar off the launch pad, it can be difficult to determine exactly why the rocket streams skyward. Is it the product’s high quality? The right price point? The marketing campaign? Or is it because it happens to dovetail with the zeitgeist in such a perfect way as to become trendy? Or is it some, or all, of the above

There are ways of doing retail right, however. Here are two examples of crash-and-burn retail and one example of steady retail.

Christopher & Banks (NYSE:CBK[1]) is an interesting story because the women’s clothier was founded in 1956 under the Braun’s name. It went public in 1992 and returned 350% to shareholders through 2000, when it rebranded as Christopher & Banks. The stock took off over the next two years, as the rebranding campaign obviously worked. The stock was a 9-bagger over that period.

Since then, the stock chart has looked like an extreme roller-coaster ride. It last hit $30 in 2006 and now trades at $2.43, and CBK just eliminated its dividend. The other problem with retail is that a bad economy can hammer a company. After a solid 2007, Christopher & Banks’s net income gradually eroded. It’s had losses the past three fiscal years and is set to do so again. Women’s clothing can be both trendy and subject to economic weakness.

Chico’s FAS (NYSE:CHS[2]) fared even better. From 2000 to 2006, the stock was a 36-bagger. Although it serves a different market, the economy has been equally harsh on Chico’s. But I give Chico’s a better chance of survival than C&B. The latter has weak cash flow and $84 million in cash. Chico’s at least has been turning a sizable profit each year and has plenty of cash on hand.  It’s stock, however, is 75% off its all time high.

The Buckle (NYSE:BKE[3]) takes an approach I prefer: 43% of sales are denims, 37% are tops and 29% is private label. This means The Buckle serves up simple, no-frills clothing that doesn’t rely on the latest fashion fad. The Buckle doesn’t try to be anything other than what is is, and doesn’t have the wildly varying earnings of other companies.

The Buckle knows its Midwest, suburban market and plays right into it. Its net margins are 14% vs. Chico’s 7%. While earnings haven’t been growing during these tough times, the company has had net income of $125 million, give or take a few million, each of the past thre years and is poised to do so again. It  produces solid free cash flow to finance expansion. The stock has experienced some volatility but not like its peers, and it’s only 15% off its all-time high.

So, before leaping into a retail stock, take a good long look at the market it serves and what products it sells. You don’t want to go with the trend, because you may find yourself on the downhill part of that roller-coaster ride.

Lawrence Meyers does not own shares of any company mentioned.

Endnotes:
  1. CBK: http://studio-5.financialcontent.com/investplace/quote?Symbol=CBK
  2. CHS: http://studio-5.financialcontent.com/investplace/quote?Symbol=CHS
  3. BKE: http://studio-5.financialcontent.com/investplace/quote?Symbol=BKE

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