3 Retailers for the Long-Term

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

Retailers typically operate in a highly competitive business fighting tooth and nail for every scrap of business they can find. A retailer typically competes with 4-5 major competitors. Long-term investing entails holding a publicly traded business for decades in order to minimize trading costs and capital gains tax liability. In order for a retailer to qualify for a long term holding it must meet the following criteria:

1.) Few major competitors

2.) Market leadership

3.) Customer centric

Three retailers stand out as meeting the above criteria:

Home improvement retailer Home Depot (NYSE: HD) faces only one major competitor: Lowes (NYSE: LOW). Moreover, Home Depot maintains a market leadership position in home improvement retailing with 2,200 stores versus 1,745 for Lowes.

Also, Home Depot demonstrates its customer centric attitude when its associates greet customers walking through the door, and they always seem willing to help.

Home Depot will benefit from the housing recovery. In the most recent quarter, Home Depot saw consolidated sales increase 5%. The number of customer transactions increased 2%. Comparable store sales, for stores open longer than a year, increased 4%. In addition, Home Depot provides a 1.7% dividend yield paying out only 29% of its free cash flow.

Lowes didn’t quite fare as well in that time frame. It struggled with the closing of certain stores. Lowes’ consolidated sales increased 2%. Its number of customer transactions decreased 50 basis points or 0.5%. Lowes comparable store sales increased only 2%. However, Lowes only paid out 20% of its free cash flow in dividends, which stands as a good thing considering its struggles.

Discount retailer Wal-Mart (NYSE: WMT) lies at the center of the universe in most shopping centers. Wal-Mart maintains a clear market leadership position with ownership of 10,773 stores exceeding its only major competitor, Target (NYSE: TGT), by a factor of 6.

Wal-Mart’s customer centric attitude shows in its low merchandise price. Its massive distribution system and ubiquity allows Wal-Mart to buy merchandise in volume and sell merchandise at an extremely low cost. This serves as a draw to customers from miles around. People will drive past other grocery stores to go to Wal-Mart.

Wal-Mart increased sales 3% in its most recent quarter, quite impressive for a large company with a market capitalization of $237 billion. Comparable stores sales increased 2%. Wal-Mart provides a 2.3% dividend yield, as of this writing, paying out a reasonable 55% of free cash flow.

Target also increased its sales 3% even though its market cap is 17% of Wal-Mart’s. Target’s comparable stores sales did increase 3%. Target does provide a 2.3% dividend yield as of this writing, but paid out 61% of its free cash flow out in dividends.

Online retailer Amazon (NASDAQ: AMZN) stands alone as the only online retailing conglomerate with any notoriety. Amazon competes with Best Buy in electronics, Wal-Mart for merchandise in general, and Books-A-Million and Barnes & Noble in the bookstore arena. With the exception of Wal-Mart, Amazon left these other competitors in ruins over the past three years.

Amazon CEO, Jeff Bezos, centers the operation of his entire company on the convenience of the customer. Amazon has boosted investment in building new fulfillment centers to reduce the delivery time to the customer. Capital expenditures for 2012 increased 109% versus 2011 as a result.

Amazon continues to grow in leaps and bounds. In 2012, Amazon increased revenue 27% for the full year versus 2011. Profitability took a short term hit for the sake of long term gains due to the investment in the fulfillment centers. Amazon turned a loss for 2012; however, its operating cash flow managed to expand 7%.

On the whole, if an investor wants to invest in retailers for the long term that possess few competitors, market leadership and treat customers as the bosses then Home Depot, Wal-Mart, and Amazon fit those criteria making them viable long term candidates for your portfolio.

William Bias has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Home Depot, and Lowe's. The Motley Fool owns shares of Amazon.com. 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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