Smart Fools Buy Retailing Results, Not Retailing Hype

Dana is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

For every industry, investors need a different rule.

For technology you want to see an entrepreneur in place and you need to see exciting new products. In oil you invest wherever the bottleneck lies.

In retailing, you look at sales. Period. What have you done, what has been happening on the sales floor. Show me that sales momentum and I'll buy your story. That's all that counts.

You can buy the hype of a technology company, but you never buy the hype of a store. Once again, this week, we learned that lesson.

J.C. Penney Fail

By now everyone knows about the failure of Ron Johnson at J.C. Penney (NYSE: JCP).

Johnson, former head of the Apple Store franchise, was hired to lead JCP out of the wilderness on June 14, 2011. He had big plans about reinventing the industry. At the peak of his hype cycle, in early 2012, the stock was selling at over $42.

As the hype cycle neared its peak, I was a voice in the wilderness arguing that the transformation would take years to make happen, if it happened at all, and that you should put your money away. “Use your imagination, guys,” said one bullish commenter.

No, don't. Not in retailing.  Today everyone knows this. JCP is a $17 stock, Johnson's reign has proven to be a shambles, and people who know are calling him delusional. They want what happened to Groupon CEO Andrew Mason to happen to Johnson, and they can't wait for it.

Now, should you be trolling for stock at these levels? No. Treating a retailer like a real estate play is as stupid as treating it like a tech company. A retail store without sales is just an empty building. There's no bottom to fall to from retail fail, other than pure liquidation. And you're never going to get a big price on a liquidation. Avoid. While your best shorting days may be behind you, that's the only way I'd play it.

Fall into the Gap

If you are going to play retailing as a medium-term play, you go with the hot hand. You look at sales, at sales momentum, and you go where the customers are.

You fall into the Gap (NYSE: GPS).

For its most recent quarter GPS had a nice comparable store sale rise, total sales rose 10%, and the profit beat the Street.  They're not extremely well-placed geographically – they have too many stores in Japan, but they know what they're doing.

Over the last year GPS is up 36%, and going back five years they're up 69%. If you want to measure it from the 2009 lows, they're up 163%. That's what you want to see in a retailer. Gap sales – they own Old Navy and Banana Republic as well – rise and fall with the seasons, and their margins grow or shrink with the strength of the recovery. But this is a company that turns $15 billion every year, and usually knows how to draw at least 10 cents on each dollar to the bottom line.

Look for Results and Be Ready to Bail

I don't do retail much, because proper investing in retailing requires a shorter-term time horizon than I'm willing to play with. For GPS, for instance, you really have to listen for signs that the company's strategies are no longer working. You need to go into a store once in a while.

I find it best to stick with what I know and look for longer-term plays. That's why my only current investment in this space is in Costco (NASDAQ: COST). I've done well with it, but not as well as you would have done with GPS. Or, for that matter, with Urban Outfitters (NASDAQ: URBN), which is up even faster over the last year than GPS, given their emphasis on the youth market.

Which brings me to my second warning. Don't go in retail buying stuff you would never buy for yourself. You can't know what works and what doesn't in something you don't know. URBN is a fine retailer, I hear good things, but the market they play in is notoriously fickle, and I really don't think I could get out in time if the kids decided they wanted to go en masse somewhere else instead.

So those are the rules. Follow the money, demand results. Don't follow the hype or the fashion, unless you're an obsessive watcher of Bravo, and even then you don't follow the hype, just the fashion.


DanaFBlankenhorn owns shares of Costco Wholesale. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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