Investing in Retail Stocks
When a consumer walks into a favorite store and spends money there, they might wonder if they should invest in that brand. Enter: retail stocks–companies that sell everything from clothing, books, computers, homeware, tools, groceries to auto parts.
It may feel like a good idea to invest in retail stocks because we’re familiar with their stores, the products and understand the brand identities.
However, retail investing can actually be tricky, especially in today’s ecosystem. Retail companies have dealt with a lot in recent years: shifting consumer preferences, the rise of online shopping, a slew of store closures, trade wars, a global pandemic that brought about quarantine measures.
Here are some things you need to know about retail stocks before diving into them.
How to Invest in Retail Stocks
First, investors need to check to see if the retail company is public. Being public means shares of the business are available for any investor to buy in the stock market. They can do this by looking up the company’s stock ticker symbol on the internet or via their brokerage account. For those who just want exposure to the industry as a whole, they can find a retail-stock exchange-traded fund, or ETF.
Recommended: What Is an ETF?
Why do retail companies go public? Typically in order to raise additional funds that are used to open more stores, expand overseas, invest in their e-commerce platform, or buy another retail company.
As a stockholder in a retail company, the investor holds a partial ownership, or a share, of the business. The owner of a stock is also entitled to dividends the company may disburse, and benefit from any potential increase in its share price. They also have the right to participate in shareholder votes.
Being a retail investor isn’t for the faint of heart. It takes a lot of due diligence. Investors should read quarterly earnings reports the company makes, monitor for any additional announcements the company makes related to company performance or new products, and pay attention to management changes like a new CEO or CMO.
Recommended: Reading an Earnings Report
It also takes an investor who isn’t afraid of a little volatility. Retail stocks can be particularly turbulent when reporting earnings for the back-to-school or holiday seasons–when many companies make a majority of their sales.
Changes in the Retail Industry
Remember back in the day when the mall was the place everyone went to hang out or go shopping? That reality has shifted radically with the advent of ecommerce. Consumers have increasingly migrated online to make their purchases, and retail companies have had to change alongside them.
Take holiday spending, the most important season for many retailers. Online spending has continued to outpace in-store spending, with the gap widening in recent years due to mobile spending.
The shift also accelerated as the Covid-19 pandemic caused consumers to avoid crowds and buy more through web purchases, according to a 2020 Deloitte survey . The average spend online in 2020 was $892 versus $390 in person, the survey shows.
Question: What percentage of your total holiday budget do you expect to spend…
| 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | |
|---|---|---|---|---|---|---|
| Online? | 51% | 50% | 55% | 57% | 59% | 64% |
| In-store? | 46% | 45% | 38% | 36% | 36% | 28% |
Source: Deloitte
The e-commerce revolution has changed the stores along Main Street or malls into more of a marketing tool, rather than a first point of sale. Over the last few decades, stores have had to adapt to create exclusive consumer experiences only found in-store.
Those that couldn’t keep up with the changing times had to shut their doors. According to research and advisory group Coresight Research, a record 10,000 stores could close in the U.S. in 2021. That would mark a 14% jump in total closures from 2020. Coresight also predicted about 4,000 store openings in 2021, but mainly by discount grocers and dollar-chain stores.
Looking at Retail Stock Metrics
Here are some ways investors can evaluate whether to invest in a public retail company:
1. Visit a few physical locations. This way, an investor can get a sense of what’s happening on the ground. Is the store selling timely merchandise? Is the store well lit and laid out? Is there a lot of foot traffic? All of these are important ways an investor can try to gauge a company’s health.
2. Visit the store’s online platform. If the store’s e-commerce operation seems strong, it is easy to navigate and offers customer service. This, too, points to the good health of a company.
3. Next, it’s time to dig deeper into the company’s finances. Some measures that can be particularly helpful to retail investors include comparable store sales–also known as same-store sales. These are sales trends of stores that have been open at least one year.
4. Also examine margins, or how much the revenues a company makes after subtracting the cost of goods sold (COGS), and inventories, or how much in goods the company has stocked. Too much inventory can signal slow sales, while too little may be a sign of operational or production issues down the road. These numbers may fluctuate depending on the season.
5. Use traditional valuation metrics, such as price-to-earnings ratio or price-to-sales ratio. Public retail companies are required to report net income and revenue figures, which investors can use to gauge how expensive or cheap the shares are trading at.
6. Pay attention to broader industry trends by looking at earnings of competitors or changes in e-commerce trends. The National Retail Federation (NRF) could also be a good resource for information.
Possible Risks of Investing in a Retail Stock
Like all investments, retail stocks can come with risks. Take the global Covid-19 pandemic, which led to a quarantine across many cities in the world in 2020, causing consumers to be stuck at home and be wary of visiting stores.
Here are some of the other ways the industry can be vulnerable:
• Retail stocks can be highly cyclical, or tied to economic conditions. In a recession, non-essential purchases may be the first to go for many consumers and may cause an otherwise healthy retail store to sink. Investors may benefit from balancing their portfolio with non-cyclical companies, like utility, telephone or health-care stocks.
Recommended: Why Portfolio Diversification Matters
• Retailers are often at the mercy of changing regulations. This could include rising minimum wages or regulation changes in a supply chain.
• Retail stocks are also often at risk of consolidation. The retail industry is shrinking in some ways, with larger players constantly buying or swallowing up smaller companies. This causes a rapidly changing landscape that must be monitored at all times.
Recommended: What Happens to a Stock During a Merger?
The Takeaway
Retail businesses can be volatile stock investments, going up and down with the seasons, along with changes in consumer confidence. Furthermore, the e-commerce and mobile phone revolution has added pressures to the retail financial landscape.
Investing in retail stocks involves keeping tabs on how brands are dealing with shutting malls, building digital platforms and changing expectations among consumers. Investors can also benefit from understanding more retail-specific metrics like same-store sales, margins and inventories. They can also use traditional valuation measures like P/E or P/S ratios.
It takes time and research to invest in retail stocks. With SoFi Invest®’s Active Investing platform, investors can pick and monitor the retail companies they’d like to be shareholders of. If a particular company’s price is outside what an investor can afford, they may be able to buy fractional shares, or stock bits of a whole stock, through SoFi’s Stock Bits offering.
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