Bargain Hunters - If You Shop There, Don't Invest.
Sean is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
This month Tesco's (NASDAQOTH: TSCDY.PK) results came out and for the first time in 18 years they announced a profit decline. Tesco has always been known as a 'safety' stock with Steady growth, nice dividends and pretty much total immunity to market volatility as a result.
Warren Buffett purchased a large amount of Tesco stock last year as it fits his model as a 'value' investment. However, since the change in management, Tesco’s share price has plummeted alarmingly. Tesco's stock price decline was due to the profit fall which resulted from Tesco's move toward coupons and price cuts.
This particularly interested me, as my job as editor of money saving website Watch My Wallet means I’m constantly on the lookout for new voucher and discount code offerings. In fact, we've just launched our own voucher site, which is targeted at small, independent business rather than large retailers.
It seems that vouchers and discounts are great for consumers, but not for the large businesses offering them. My advice to the frugal readers of Watch My Wallet is this; “don’t buy shares in any business from which you’re currently getting great discounts.” Stick with high margin retailers if you’re looking at retail stocks.
Over the last 12 months Tesco lost over 15% in the share value. They got their pricing wrong at Christmas and the market hammered them when they announced their results. However, you could argue Tesco would now be a decent buy because their price has dropped so low.
Tesco is the biggest retailer in the UK, with sales in its stores accounting for £1 in every £8 spent. Its biggest competitor is Wal-Mart's ASDA (NYSE: WMT). Wal-Mart's immense buying power means that they can probably afford to be more daring with voucher and discount offers to keep their customers coming back, but they lack one vital component (as do Tesco) that will always influence their margins. They don't sell products that their customers genuinely crave. Unlike Apple.
Fat Margins
Apple has seen astronomical share growth over the past 3 years and one of the main reasons is there incredibly high margin on the goods they sell.
Apple is, contrary to what people might believe, not even a market leader in Smartphones - the reason it makes so much money is the size of its margin on the products it sells. Big margins and room to discount might not be great for bargain hunters, but they make for a safer stock.
Performance in India and China will determine which retail stocks interest me the most. Wal-mart's dominance in China is receding as France's Carrefour SA (NYSE:Euronext Paris) and Tesco compete with local business like Sun Art (6808: Hong Kong).
While last month's reforms to India's regulation of retail operations means big international retailers will be able to buy up majority stakes in domestic players. Wal-mart announced plans to open stores in India within "two years."
Investors looking at retail stocks would be wise to actually go out into these stores and get a feel for their pricing and then take a look at their financial statements to find out what sort of margins they're playing. Low margins and heavy discounts are great for the consumer, but can be pretty scary as an investor.
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Sean O'Meara does not own shares in any of the companies mentioned in this story. He is employed by Watch My Wallet. The Motley Fool owns shares of Tractor Supply Company. 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.If you have questions about this post or the Fool’s blog network, click here for information.
