Investing in Retail Stocks
Table of Contents
When a consumer walks into a favorite store and spends money there, they might wonder if they should invest in that brand. Enter: retail stocks, or shares of companies that sell everything from clothing, books, computers, homeware, tools, groceries to auto parts.
It may feel like a good idea to invest in retail stocks because we’re familiar with their stores, the products, and understand the brand identities. However, retail investing can actually be tricky, especially in today’s ecosystem. Retail companies have dealt with a lot in recent years: shifting consumer preferences, the rise of online shopping, a slew of store closures, trade wars, a global pandemic that brought about quarantine measures.
Key Points
• Retail stocks represent companies selling various goods to consumers.
• Visits to retailers’ physical stores may offer insights into company health.
• Online sales often outpace in-store purchases, especially during holidays.
• Metrics like same-store sales, margins, and inventories are crucial for evaluating stocks.
• Retail stocks tend to be volatile and cyclical, influenced by economic conditions.
How to Invest in Retail Stocks
First, investors need to check to see if the retail company is public. Being public means shares of the business are available for any investor to buy in the stock market. They can do this by looking up the company’s stock ticker symbol on the internet or via their brokerage account. For those who just want exposure to the industry as a whole, they can find a retail-stock exchange-traded fund, or ETF.
Typically, retail companies go public in order to raise additional funds that are used to open more stores, expand overseas, invest in their e-commerce platform, or buy another retail company.
As a stockholder in a retail company, the investor holds a partial ownership, or a share, of the business. The owner of a stock is also entitled to dividends the company may disburse, and benefit from any potential increase in its share price. They also have the right to participate in shareholder votes.
Being a retail investor isn’t for the faint of heart. It takes a lot of due diligence. Investors should read quarterly earnings reports the company makes, monitor for any additional announcements the company makes related to company performance or new products, and pay attention to management changes like a new CEO or CMO.
It also takes an investor who isn’t afraid of a little volatility. Retail stocks can be particularly turbulent when reporting earnings for the back-to-school or holiday seasons — when many companies make a majority of their sales.
Recommended: Reading an Earnings Report
Changes in the Retail Industry
Remember back in the day when the mall was the place everyone went to hang out or go shopping? That reality has shifted radically with the advent of ecommerce. Consumers have increasingly migrated online to make their purchases, and retail companies have had to change alongside them.
Take holiday spending, the most important season for many retailers. Online spending has continued to outpace in-store spending, with the gap widening in recent years due to mobile spending.
In some cases, the e-commerce revolution has changed the stores along Main Street or malls into more of a marketing tool, 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.
However, some digital-native brands have gone the opposite way, starting online and then opening physical stores. Examples include Warby Parker, Amazon, Allbirds, Skims, and Away, among others.
Looking at Retail Stock Metrics
Here are some ways investors can evaluate whether to invest in a public retail company:
• Visit 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 laid out? Is there a lot of foot traffic? All of these are important ways an investor can try to gauge a company’s health.
• Visit the store’s online platform. If the store’s e-commerce operation seems strong, it is easy to navigate and offers customer service. This, too, points to the good health of a company.
• Next, it’s time to dig deeper into the company’s finances. Some measures that can be particularly helpful to retail investors include comparable store sales–also known as same-store sales. These are sales trends of stores that have been open at least one year.
• Also examine margins, or how much the revenues a company makes after subtracting the cost of goods sold (COGS), and inventories, or how much in goods the company has stocked. Too much inventory can signal slow sales, while too little may be a sign of operational or production issues down the road. These numbers may fluctuate depending on the season.
• Use traditional valuation metrics, such as price-to-earnings ratio or price-to-sales ratio. Public retail companies are required to report net income and revenue figures, which investors can use to gauge how expensive or cheap the shares are trading at.
Pay attention to broader industry trends by looking at earnings of competitors or changes in e-commerce trends. The National Retail Federation (NRF) could also be a good resource for information.
Possible Risks of Investing in a Retail Stock
Like all investments, retail stocks can come with risks. Take the global pandemic, which led to a quarantine across many cities in the world in 2020, causing consumers to be stuck at home and be wary of visiting stores.
Here are some of the other ways the industry can be vulnerable:
• Retail stocks can be highly cyclical, or 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. Investors may benefit from balancing their portfolio with non-cyclical companies, like utility, telephone or health-care stocks.
• Retailers are often at the mercy of changing regulations. This could include rising minimum wages or regulation changes in a supply chain.
• Retail stocks are also often at risk of consolidation. The retail industry is shrinking in some ways, with larger players constantly buying or swallowing up smaller companies. This causes a rapidly changing landscape that must be monitored at all times.
Recommended: What Happens to a Stock During a Merger?
The Takeaway
Retail businesses can be volatile stock investments, going up and down with the seasons, along with changes in consumer confidence. Furthermore, the e-commerce and mobile phone revolution has added pressures to the retail financial landscape.
Investing in retail stocks involves keeping tabs on how brands are dealing with shutting malls, building digital platforms and changing expectations among consumers. Investors can also benefit from understanding more retail-specific metrics like same-store sales, margins and inventories. They can also use traditional valuation measures like P/E or P/S ratios.
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FAQ
What are retail stocks?
Retail stocks are shares of retail companies, which could include brands or chains that sell consumer products in physical locations or online. Examples of retail products include sporting goods, food, books, hardware, and more.
What are some risks involved with retail stocks?
Investing in retail stocks involves risks such as the cyclical nature of the retail industry, potential for changing regulations, and risks of consolidation.
What are some ways to invest in retail companies?
Investors can buy shares of retail companies, or even ETFs or index funds that are focused on the retail sector. There may be other ways to invest, too, such as through corporate bonds.
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