Walking into a favorite store may bring on a little rush of adrenaline with the anticipation of buying something needed, wanted, or longed for. Items are diligently picked up and tried on or tested out, being examined for a potential purchase. Time, effort and money are invested in the decision about which items to add to the shopping cart.
There’s a wave of joy upon checkout with the realization that the new favorite item will soon take its place in its new home. When a shopper spends a lot of money in a particular store, they might wonder whether they should be investing in that company. Enter: retail stocks.
Retail stocks may seem like a good idea to most as it’s one of the most tangible trades. We all have favorite stores and favorite products, so it is a natural correlation to want to invest in the company that makes said goods.
However, retail stocks can be tricky. Especially in today’s retail ecosystem. Here’s everything you need to know about retail stocks before diving headfirst into the market.
Related: What is impact investing?
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What are retail stocks?
All stocks represent partial ownership — a share — in a business. The owner of a stock is entitled to a percentage of the profits in that business. That percentage is based on the number of shares in a company one owns. This is often called earnings.
Retail stocks cover the retail industry: stores that sell physical goods such as clothing, books, computers, homeware, tools, groceries, auto parts and more.
Owning retail stocks is essentially partial ownership in any business within the retail industry that sells goods directly to a consumer for personal use through a store or e-commerce website.
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What are the biggest retail stocks right now?
Though this can change rapidly in the market, some of the biggest — and most recognizable — retail stocks include Amazon, Walmart, Target, Costco, Best Buy, Home Depot and Lowe’s.
There are many others including TJX Companies, which owns TJ Maxx and Marshalls, as well as The Gap, Sears Holding, CVS Health Corporations and thousands more.
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Changes in the retail industry
Remember the olden days when the mall was the place everyone’s mom drove them to pick up a few items for back-to-school shopping? Or, for the really lucky, there was catalog shopping. It was a simpler time when shoppers could only buy things in person.
That was the reality until the internet came along and changed everything forever. More specifically, that was until Amazon came around and changed retail for good.
In 1994, Jeff Bezos launched a digital bookstore known as Amazon. Since then, that small, online operation has grown into one of the most profitable businesses in the world.
However, with all that success Amazon also changed the retail industry forever, swallowing up competitors, mom-and-pop shops and brick-and-mortar stores along the way.
Because of the moves Amazon has made over the last 25 years, retail has had to change alongside it. That meant more stores having to move into the digital space, creating an entire ecosystem of e-commerce websites.
And large chains like Walmart, Target, Sears and Home Depot had to adapt, too, as Amazon began to sell the same merchandise at often better prices and with faster delivery times.
These stores and others then had to become what is known as omnichannel, offering both online and in-store offerings. Chains like Target began offering online ordering with in-store return or exchange. Though these are two separate business models, they now have to operate as one.
This shift in consumer focus to online shopping also changed the stores along Main Street, USA, into more of a marketing tool and destination rather than a first point of sale.
Over the last few decades, stores have had to adapt to create exclusive consumer experiences only found in-store. Those in-store activations look like the Geek Squad at Best Buy, and the Apple Care experts in-store, or Ulta Beauty’s salon experiences.
Those that couldn’t keep up with the changing times had to shutter their doors. According to the global marketing research firm Coresight Research, nearly 9,100 store closures were announced in 2019 alone. That marked a 55% jump in total closures from 2018.
Those closures included Payless Shoes, craft store A.C. Moore, DressBarn, Barneys New York and more closing physical stores.
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Looking at retail stock metrics
Deciding to invest in retail stocks is truly a hands-on affair. Evaluating a stock takes time, but one of the best ways to assess whether to invest is visiting a few physical locations. This way, an investor can get a sense of what’s happening on the ground.
Is the store selling timely merchandise? Is the store well lit, and well laid out? Is there a lot of foot traffic? All of these are signs that the store is probably in good financial health.
After visiting a store’s physical location, a prospective investor might want to check out its online presence, too. If it doesn’t have one, that’s a problem.
However, if the store’s e-commerce operation seems strong and includes similar merchandise to its in-person locations, is easy to navigate, and offers customer service, this, too, points to the good health of a company.
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The 4 R’s of investing in retail brands
Next, it’s time to dig deeper into the company’s finances. With this, it could be a good idea to look into the Four Rs of Investing in Retail: return on revenues, return on invested capital, return on total assets and return on capital employed.
• Return on revenue indicates how much net income the company made — or profited — after paying employees, taxes, supplies, or any other outflows.
• The return on invested capital is the amount of profit a company made per store. This is a key metric for larger chains as it also shows how quickly each location was able to return the capital invested to open its doors. It can be an indicator of how fast a larger retailer may be able to grow its profits.
• The return on total assets looks at the total profits made from a company’s total assets. This, again, is a key metric for larger companies like Amazon that own multiple businesses (e-commerce, cloud computing, a music arm and more).
• Finally, return on capital employed is a bit more nuanced but shows how well a retailer uses its own capital. According to Investopedia, this is defined as “earnings before interest and taxes divided by capital employed, which typically represents total assets less a company’s current liabilities.”
After all this, it may also be prudent to look at comparable store sales. This means comparing a store’s sales during the same time periods of different operating years.
For instance, a retailer might look at a store’s fourth-quarter sales from 2017 and 2018 in order to gauge growth and make adjustments for 2019.
New stores may skew numbers, making a retailer look more profitable. By looking at comparable-store sales from locations that have been open for a year or more, however, one can glean just a little more information on how well a retailer is performing and if its new-store good luck will last.
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Who might want to invest in retail stocks?
Becoming a retail investor isn’t for the faint of heart. It takes a lot of due diligence and time before an investor decides where to plunk down some cash.
It also takes an investor who isn’t afraid of a little volatility within a stock. Retail stocks can offer big wins for those willing to stick it out and can stomach the price swings that inevitably happen over the course of a year (holiday, back-to-school, and other major retail shopping times countered by periods of consumer inactivity).
All that said, investing in retail is easy enough for even novice investors. Each investor should choose a retail stock that feels like a good portfolio fit for themselves.
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Possible risks of investing in a retail stock
Like all investments, investing in a retail stock can come with risks. Retail stocks are highly tied to economic conditions. In a recession, non-essential purchases may be the first to go for many consumers and may cause an otherwise healthy retail store to sink.
Retail stocks are also often at risk of consolidation. It’s unquestionably a shrinking field, with larger players constantly buying or swallowing up smaller companies. This causes a rapidly changing landscape that must be monitored at all times.
Furthermore, retailers are often at the mercy of changing regulations. This could include rising minimum wages or regulation changes in a supply chain. All of these are things investors may want to take into consideration when assessing personal risk tolerance with any stocks.
As for when to buy retail stocks, that’s totally up to the individual investor. But the best time to buy will always be after all the homework is done and an investor feels confident in investing their cash. Timing the stock market doesn’t work in investors’ favor.
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