If you want to invest in retail stocks, you certainly need to perform retail stock analysis. And even if they seem easy to understand, retail firms can be a tough nut to crack when it comes to the analyzing investor. There are different metrics that can help you, though. The following are some tips you can use when analyzing retail stocks.
You can learn a lot just by visiting the shop of a particular retail store. You can find information easily, including the store’s layout, the availability of the merchandise, and the prices customers have to pay.
In general, you should look for stores that are well-lit, sell trendy and fashionable merchandise, have clean displays, and offer few discount items.
Also, take note of the foot traffic in the store. It’s usually a good sign if the store is often crowded with buying customers. At the same time, this will give you an idea about the overall health of the company.
See whether the company is doing to something to promote its products. This feature is important because companies that are willing to sell their merchandise at huge discounts to unload it before the selling seasons ends often do so at the expense of their earnings and margins.
You can visit store websites or online ads to know whether the business is begging its shoppers to come into the store. This can be a sign that the company is headed towards an earnings downturn.
Look at the gross margins and analyze the sequential and year-on-year growth. While doing this, keep in mind the seasonality effects.
A huge number of retailers see a jump in revenues during the fourth quarter when compared to the third quarter because that is the quarter for holidays.
Regardless, the gross margin trend will give you an idea about the status of the current or future period earnings.
Be aware of retailers that see declines in their gross margin. Such companies are probably experiencing a loss in revenue or foot traffic. There may also be an increase in product costs or heavy markdowns in their merchandise.
This one is the most important metric when it comes to retail sales analysis. The same-store sales data reveal how a store or a group of stores perform on a period-to-period basis.
Of course, the idea is to see both sequential and year-over-year same-store sales growth. This kind of performance indicates the store’s concept is working and its merchandise is fresh.
On the flipside, if the same-store sales data are declining, it may mean that a number of problems currently bug the company.
Lastly, you should analyze the sequential and year-over-year trends in both the inventories and accounts receivable.
If the company is faring well, the wo metrics should be showing growth at about the same speed as revenues.
On the flipside, if the inventories are growing faster than revenues, if may mean the company cannot sell certain products.
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