Tuesday, July 28, 2009

'If you knew Retail like I knew Retail ...."

OK, I get it...the consumer is dead...retail is dead...whe're all gonna burn and die and go to hell. But before you go short the RTH (Retail holder ETF) you should understand what drives retail - and it is not just consumer consumption....

I have had the luxury of owning, or working in DOZENS of totally different industries in my 30 year professional life (do NOT date me). One of the benefits is to understand the dynamics of what drives an industry - Trust me, it is a different perspective than the same old recent headline that retail is dead.

It was the late seventies, and fresh out of school, I joined my brother and we started a retail clothing store. We rented space in Roxbury Massachusetts (the ghetto) because rent was dirt cheap. Ultimately after making many mistakes, and learning along the way, we determined we would have more success being a specialty retailer operating in a 'closed area' (neighborhood not mall). So we jettisoned Junior and Missy and became a plus size store for *gulp* FAT* women. It was the perfect strategy- after all our then racist view was that 'women of color' ate a lot of fried chicken- thus lots of fatties in the ghetto - Fat women were less likely to steal (only the ultra skinny crack whores were stealing to pay for their habits), and our only competition - Lane Bryant would never have the balls to open a store in the ghetto. Well as wrongly bigoted as we were, we thrived, and subsequently expanded the chain to over a dozen stores (I subsequently sold my interest when I met my wife and went to work for Lehman Brothers in New York City).

So while it is easy to just make the statement that retail is dead, it is actually more complex than that. The first thing I will share with you is in my opinion, the most important;

Retailers make their money by 'inventory turns'... (huh?) Think of it this way... In Retail, you are buying your inventory using other peoples money...You order the goods...They get delivered, and then you have either 'net 30,net 60 or net 90' day terms to pay for them depending on your credit status. So what is making retailing so attractive, is that you are using 'other peoples money'. As a result, he more times you are able to turn your inventory over, the more money you will make.

Now do NOT get me wrong, I believe that we are in a decade of retail where there are just too many doors (too many stores competing for the same dollar) . But just as I make a case for the IYR (Commercial RealEstate Index) in my previous post - the same economic logic applies to the RTH. Our economic debacle will wipe out the week sisters ... Johny retailer who has not ordered LEAN is GONE. For that matter, even public companies that do not have excellent balance sheets will be gone.

Should CIT go bankrupt this will actually HELP the RTH index...why? First, understand what function CIT provides. I know that S&P reports describe them as providing credit to small business - but let's translate that into English. If you are a small mom & pop retailer a wholesaler will NOT ship good to you unless one of two things take place;

1) You pay cash up front (NOT they way a retailer will survive - remember retail makes money using OTHER peoples money).

2) You order your goods through a 'factor' such as CIT, where CIT pays the wholesaler, and jacks up the price to the retailer, effectively becoming the middleman.

You need to think 'big-pic' here...who does this help/hurt the most? Johnny Retailer is the one who will loose here... Remember the nationals have access to the capital markets, and thus can finance their inventories via banks till the smoke clears... all the while, Johnny Retail can NOT , and eventually closes his doors - hence removing one of those many extra doors that exists today.

Macro thesis number two for retailers is that if you are a national (or even strong regional) chain, you are in a position to re-negotiate your lease. From my retail days, I can recall signing a 2 year - with a 10 year option that I desperately wanted out of when I realized the location (college town) just wasn't working for my type of biz. Outcome? I sold it as a sub-lease to a jewelry store that actually PAID me $50k to assume my lease! The same thesis works in reverse for retailers of clout when dealing with landlords. Make no mistake about it, if the Limited is hurting, one phone call to Simon properties cuts one of their largest expenses by 30%!

Most publicly traded retailers also do a build-out over years...thus leases come up for renewal every year...do not think that every lease is automatically renewable at the same time (this works for them, and against them but is ultimately neutral for most).

Last point I will make is that aside from the biggest factors affecting retailers...ability to run lean inventories...negotiate leases.... Look at their workforces... Now more often than that, the MAJORITY of the workforce is part time ...a MUCH smaller expense dollar for dollar than a full time employee...

In summation Retail is no different than any business in this economy...there was (AND IS) a lot of fat that could be cut... and that is what we are seeing. When you cut fat, you see a surprisingly bigger 'E' in the P/E' of corporate America and this is why I am a bull...

Debate me on Stocktwits .... I am @A_F





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3 comments:

  1. Compelling arguments @A_F. I had not looked at $RTH like that before. Thank you for your insights.

    -- @mattrixDOTinfo

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  2. This is very thoughtful article. Your retailing sense is brilliant, that we can figure out from your retail store idea in “ghetto”. I agree with you retail business has lots of fat; we need a concept and business sense to take out our piece of interest.
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  3. Excellent tips. Really useful stuff .Never had an idea about this, will look for more of such informative posts from your side.. Good job...Keep it up
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