Retailing is a Tough Business (Industry KPIs to Follow)

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1:55tuned in to the Investing for Beginners podcast. Led by Andrew Sather and Dave Ahern. Step-by-step premium investing guidance for beginners. Your path to financial freedom starts now. Starts now.

2:17All right, folks, welcome to Investing for Beginners podcast. On today's show, we're going to do kind of a brief overview of why the retail industry can be a tough place to invest. And along with that, we're going to discuss a couple of companies in Andrew's portfolio that just reported earnings. Dick's Sporting Goods as well as Costco are one of our longtime favorites. And we'll kind of use this to kind of interweave why retail can be a challenge. So with that, let's talk a little bit about maybe Dick's and Costco and maybe let's talk about some of their earnings. Yeah, love it. So it's another month, another time for earnings.

2:56I'm going to walk through really quickly how I like to keep myself updated on this stuff. And this is a newer for me and I'm enjoying it a lot because it saves me a ton of time. So I'm going to pull up FinChat.io now called Fiscal.ai. In the dashboard, I click on my portfolio. I have like an idea. So right, There's a news and then there's annual and quarterly reports. So just clicking those couple things, I now see a list of every company's quarterly report, annual report that they've submitted. And, you know, it's in chronological order, which is really, really nice. So I can look at the month of June and I can see, like you said, Dick's Sporting Goods and Costco.

3:38So quarterly tab, it brings you to the 10K, the most recent one. And then there's an AI summary tab you can click and boom. We are up here. I can see very quickly because everything's bulleted. Net sales up 5.2%, comp sales 4.5%. And then some of the commentary from management about different aspects of the business. For Dick's, for example, they just acquired Foot Locker, which was a controversial idea. $2.4 billion is a transformative move and they're expecting $100 to$125 million in projected cost synergies. And this is all stuff that I can scroll down and read through the report, but it's really nice to just have that.

4:25Within seconds, I've got kind of that dashboard look at my different companies. And so for me, when I'm looking at retailers, and maybe this is something we can help describe, maybe somebody's looking at retail businesses for the very first time. Comparable sales is something I'm always looking at. And it's company context specific, but it's a very useful metric for retail. And I'd love if you can describe to the audience why that's the case, why as investors, we put so much focus on comp sales. Yeah. The easiest way to describe it is in essence, you're comparing sales from all the stores that are open to what they did the quarter before or the year before.

5:12And the reason why this is so important is several reasons. And I related to the restaurant business because that's where I cut my teeth in this. But for us, it was all about, are you growing the store's sales organically? And how are you doing that? And that tells you as a restaurant owner or a Dick's Sporting Goods owner, how effective A, your marketing is, how effective your sales is, how effective your products that you're putting out there, how much people like them. And so all those things kind of roll into how well the company is performing overall, but also individually on a store level, how well are those stores improving?

5:57And if you start to see those things go the other direction. I don't have the numbers for like Sears in front of me or something like Radio Shack, but I guarantee, maybe not Radio Shack, but Sears, I guarantee you, you started seeing same store sales going the wrong way. And that is a sign of problems. It means that what you're selling is not resonating with people anymore. And so when you're looking at something like a Dick's, a Costco, restaurants, any of those kinds of retail stores, you want to see same-store sales growing. And like Andrew said, it can be company-specific. You can't compare Lululemon to Dick's, for example.

6:35They're just not really the same. So you have to kind of look at maybe similar comps to something like Dick's, like Foot Locker would have been a good comp to look at to give you some sense of how good or bad Dick's is doing. And kind of the same with restaurants. You look at Texas Roadhouse, you can't look at McDonald's. It's not the same kind of beast. So you just, you have to, like anything else, you have to find good relative companies to, to compare them to. But that's, that's what I, when I look at same store sales, it's always how well is that company doing organically within their store, within the company and how well they executing on their plan to try to continue to grow and offer products that their customers want.

7:19Yeah, I guess to that point, Dick's Sporting Goods Academy, those are really the two big players in this space. And so for them, comp sales down 3.7%. It's kind of a stark contrast, but they did mention a positive comp in April. So something I like to do also in fiscal is create a chart where you compare KPIs. In this case, in the charting tab, I type in the company Dick's Sporting Goods and I get the comp sales. And then I can type in Academy. And there's also comp sales in there. There you go. And so I can overlay those two against each other. And that's a very nice visual, apples to apples.

8:01and nobody likes somebody who's bragging, but Dick's Sporting Goods is beating Academy. And that's really interesting because historically Academy has always been the faster grower. It's kind of more the growthy name in the space. Dick's Sporting Goods is kind of the mature leader. And so to see Academy losing comp sales and Dick's Sporting Goods increasing their comp sales, I think is a good barometer for somebody as an investor to feel good about how that stock's performing. Yeah, absolutely, absolutely. One other thing I wanna kind of throw out there that I just kind of thought of too is a reason why you wanna look at same store sales as opposed to just overall revenue.

8:42Overall revenue is great, obviously, but if one company is building out a lot of stores and putting a bigger and bigger, bigger footprint out there, that can overshadow sometimes how well the company is really generating revenue from organic sales or from demand for their products because they just keep pushing out more and more footprint of new stores. It helps boost the overall revenue, which is great, but for longevity of that particular brand, you wanna see same-store sales growing at a good clip as well because that tells you how much demand is really for their product. It can gloss over, you were talking about the other company that may be growing faster.

9:29And that'd be maybe one of the things that they're doing is, I don't know the company, so I'm just speculating here. So forgive me. But if they're growing, if they're putting out more stores than Dix is faster, then that can mask how popular their brand is compared to just being able to, they can buy land or lease land and put up buildings really fast. And that can make the revenue look good. But then 18 months from now, that new store is wagging the rest of the company or whatnot, then that's not a great investment for the business or shareholders. And so that's why looking at same-store sales for retail in particular is very, very important.

10:10Yeah, super good point. And to kind of keep the same theme, that's exactly what the case has been. again you can just type in the company in the charting and it will show you all the different kpis so i'm pulling up academy number of stores dicks number of stores dicks has been pretty much flat since 2019 academy has seen their number of stores up three percent a year and so they've gone actually from like around 250 ish to over 300 so to that point of what you're saying they are land grab and expand and so the revenue numbers have looked nice but is that really a successful concept or is that trending in the wrong direction that's where comparable sales is really helpful yeah yeah for sure and to me that's what if you if you overweigh those like you did and you see a long-term trend of dicks doing better than than the competition then to me that indicates that they have a stronger brand and they have more staying power than the other company and it would weed me to think okay this would be a better long-term bet than the other one yes yeah uh i like hearing you say that confirmation bias perhaps maybe just a little bit uh we'll save that for a different time um let's look at costco real quick yeah um do the same process you know pull up the most recent 10q costco's numbers i think just every single time They just never cease to amaze.

11:41Net sales up 8%. Com sales up 6%. E-com up 15%. Membership fee revenue up 10%. And renewal rates, I think that's an important KPI for Costco. That kind of just shows you how happy customers are. So 92.7 % in the United States, which is a good number as well. So I also like how the summary can kind of give you some of the major trends that have been going on that you'll probably hear in the earnings call. If they mention in the 10Q, good chance it's in the earnings call as well. Things like gasoline prices, Forex, pricing, all those things. Strong car from Costco, not much to say. Yeah, just keep it on, keep it on.

12:29It's become a beast of its own. I think I might have said this before, or I'll say it again. the 92 % renewal rate for subscriptions, I think Netflix would probably be jealous of that. Something to consider. Yeah. Well, I mean, like, I keep three cards. You know, I don't have a wallet. I'm one of these cool newer kids who has three cards in the back of his phone. I took my Costco card out just to leave it on my desk so I could go run an errand, put another card in there. It almost pained me to have to leave my Costco card at home. I'm just like, man, what am I doing here? I feel incomplete without my Costco card.

13:12We can look because they do break it out in their financials. So we can pull up membership fee revenue, which is, as we know, for the company, they are driven by that. So I can kind of use the slider and see from a longer term perspective. 7.69%, almost 8 % growth since 2019. in that membership fee. So some of that's going to be opening new stores. Some of that's going to be more people visiting the same number of stores. Not bad. Definitely not bad. And then if we look at net income over the same time period, 14.3 % per year. So growing almost 15 % a year. You add the dividend, you've got around 15 % a year return.

13:59And that's really good for retail business. Really good. Really good. Especially for a big box retailer like that, that has such little margins. So there's not a lot of room for error. And it's, it's not like a tech company that's got 90 % gross margins and they make a boo-boo. It's not that the end of the world, but for Costco with the margins that they run, they have to be on top of their game always. It's a really good point. Like well-oiled machine kind of doesn't even describe it correctly. Yeah. And the other thing I like about what Costco's kind of business plan, if you will, is they are still growing the number of stores.

14:41But it's always been more conservative as opposed to you've never seen this like huge explosion of they open 450 stores in one year and then the next year, 10. It's like it's just kind of a steady number. They just keep rolling out 10, 15 stores a year. And I'm guessing, I don't have the numbers in front of me, but it's just kind of a steady growth pattern. And so when you look at the growth of the stores and then you look at the overall revenue growth of the company, and then you look at the same store sales, I think all those tell a picture of they have a plan, they're organized in their plan, and they also understand that the membership drives growth for the business.

15:25And that if they can continue to grow membership, they will see same sort of sales grow as well. Because the more people that have memberships, the more they're going to reuse the stores. And the more that they use the store, the more they're going to love it, which will lead to renewing. My wife and I's membership came due a month or two ago. And it wasn't even a conversation about whether we're going to renew it. It was like, duh. So it just happened. And there wasn't any conversation about it. So to me, that's one of the brilliant parts of their business model. Yeah. Warehouses, aka number of stores, up 2.6, 2.5 % a year since 2019.

16:07So to your point about it being really slow, moderate growth, and yet they're getting this crazy amount of earnings growth. September is World Alzheimer's Month, but most people never check their brain health until something's feeling off or wrong way down the road. I wanted to stop waiting and look at my own data ahead of time. I highly prioritize long-term cognitive health. I mean, you can feel everything going right in your body, but if you've already set yourself down a road mentally that you don't even realize you're on, it can be difficult or impossible to recover later on. And I wanted to know whether it's just a bad mental foggy day or if it's a sign of something for the future.

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18:34Download Cash App today. Visit our link in bio. Bitcoin services by Block Inc. See the Bitcoin disclosures at cash.app slash legal slash podcast. What's the best way to get started in the market? Download my ebook for free at stockmarketpdf.com. Something I wanted to mention about Costco is one of the ways that I kind of measure how well the store is doing is looking at their revenue per store. And so it's a custom metric that I made on Fiscal.ai was FinChat. And you can see that if you chart that out, you can see that it's growing nicely. It's grown, what is this here? Almost 5 % over the last, yeah, gosh, since 2013.

19:25Holy moly. So it's just kind of been a steady, slow upward to the right number. and that is something i kind of picked up in the restaurant biz was looking at how effectively a store is generating revenue from its square footage because you pay a lot of money for that square footage and so the faster you can grow the better and the more that you can grow revenues based on your square footage the better so i know we we've looked at some good retailer numbers let's talk about some of the more struggles i was just looking at a retailer this month and we were discussing it over several calls um as as we kind of look at the different stock ideas that we have

20:17and in general you want to look at economies of scale you want to look at who's the leader and usually when you are the big dog in your industry you have those economies of scale and that gives you all sorts of advantages. But if the reason why customers don't come to a retailer isn't for price, do economies of scale matter as much? And I don't have a perfect answer for you, so maybe we can kind of volley that back and forth. But when I remember Target was my big mistake in retail, bought that stock, it went up. So I was like, I'm a genius, I'm going to buy more. and then within months it peaked and crashed and I never made my money back on that and I cut my losses and so when I looked at what mistake did I do when I thought target was a great moat business obviously ended up not being as I looked at assortment their ability to find trendy items as a moat and in a lot of ways I had economies of scale in different categories versus competitors but it wasn't as cut and dry as like a Walmart or an Amazon economies of scale.

21:29But regardless, it makes me think like if you have retailers where customer behavior, Costco, perfect example. Costco is the perfect economies of scale moat business because their customers are literally there to save money. So that economies of scale makes more customers want to come. But if we're talking about a retailer, that's more discretionary or maybe not as price sensitive? Do economies of scale even matter that much? And why or why not do you think that would be the case? That's a great question. I'm just going to spitball here. So if you're looking at, depending on what it is that that store or business sells, there probably are other driving factors for people to go to that store to buy the things that the store sells so for example you know if you look at a best buy for example it's not necessarily that best buy may have the cheapest prices on let's say a radio maybe not the greatest example because radios don't really exist that much anymore how about a laptop okay yeah laptop we'll do a laptop that's a little more relevant radio is showing my age so to me it's more about finding the unit you want as opposed to the absolute best price and so i i think depending on what it is that they sell there could be advantages to the scale and them being able to define the lowest price you know if i go to if i'm going grocery shopping and i'm at the store i don't necessarily care per se about the brand really it's more about the price because i i mistakenly or not assume that the the bag of doritos that walmart sells whether it's a brand knockoff version is going to be the same air quote quality.

23:44So I'm going to pay for the cheaper thing as opposed to the brand name. Whereas I think if you're shopping for something like a laptop, it's more about the brand name or the label than it is the price per se, because yeah, you can, if you need a laptop for a particular thing, let's say work, you aren't going to care less about the price and more about the quality of what it can do for you. And you're not going to quibble about as much. You're not going to quibble if you're going to pay a thousand bucks or 900 bucks. It's not going to make that big of a deal. But for a bag of Doritos, it'll make a bigger deal.

24:25I think Best Buy is a really great example. Pulling them up on fiscal, they've had negative comp sales over the last three years. E-com really taking away that advantage that they used to have. And we have these physical stores, so it's the most convenient place to go to get a laptop. Now, to your point, when inventory is everywhere because of Amazon, it's not that much more convenient to go to a Best Buy than ordering it on Amazon. And I understand that sounds super basic and like, duh, right? Like every customer can understand that. But I think as investors, I think mental models and moats are really, really helpful because they help us take shortcuts.

25:11They help us recognize patterns. And so when we see a moat in one industry, we can overlay that in another and it helps us with understanding, with becoming an expert in an industry. The downside, the pitfall to that is if we blindly, which I'm guilty of too often, but blindly take the mental model of one industry, completely overlay it to another. And I think when you look at retail, part of it that makes it so hard is, like you're saying, there are different use cases or different contexts to why you buy different things. And so you can't take the Costco economies of scale business model and just say, well, I'm going to buy the best retailer, the biggest retailer in electronics because Best Buy has proven that that has not worked.

26:01Yes. Yeah, for sure. And I think if we go another step and think about what it is that the company sells compared to what your other options are, you have to think about how does that impact a customer's decision. So my wife loves to go to places like TJ Maxx, Marshalls, HomeGoods, and all that stuff. And it's not necessarily because she loves the brand names or the particular items. It's that she likes to shop and they offer lots of variety of different things. And they also offer a wide range of prices. And so she can kind of just, you know, as somebody who likes to shop, I, you know, I'm the typical guy, you know, I need to buy a belt.

26:47I go in, I find a belt, I buy it and I leave. You know, she wants to go literally walk the store and look at everything. And so, and that's what it's meant to do. and likewise she doesn't like she would never go to tg max's website and look for e-commerce things because that doesn't fit her that doesn't fit her way of shopping for that particular thing however if she was going to buy something like a laptop she would probably be more likely to do it via e-commerce versus going to the store interesting that you know that that difference in brand also So I think brand has been a moat that's been kind of overused by investors.

27:31And I've fallen victim to it. I mean, I bought Tiffany's. That was a great buy. And then I bought Hormel, which I thought had great brands. And that was a terrible buy. Brand is so nuanced. And to your point, you have to really put yourself into the shoes of the customer. And that's one of the big reasons why what Peter Lynch said when he said, buy what you know is so profound. because, again, Wall Street wants to take shortcuts and you try to find the next Costco or you try to find the next Amazon. And you can't just directly copy. Sometimes you can. Sometimes it works. I mean, Amazon copied Walmart in a very big way.

28:11But a lot of times you can't just make those kind of same copies. And I know lately, I mean, brands have been destroyed. Right. It's almost, it feels like either there's like a huge major shift going on, or this is like just the worst cyclical downturn to be a brand in the history of modern Wall Street. Right. Yeah. Look at, I mean, you don't need to look very far to see that in full effect. Nike is a company that certainly springs to mind that has seen, they've been on struggle bus and what was it? Under Armour. A few years ago, it was one of the hottest brands out there. Now they've been on huge struggle bus.

28:56You got to be careful with the brand designation sometimes because it can be, it could certainly be a very strong moat. You look at a company like Coca-Cola that just keeps chugging along. McDonald's to a certain extent, kind of the same, just keeps chugging along. But it doesn't mean that that moat is insurmountable. We have seen that time and time again. And it seems like it's gotten the breaching of those walls, it seems like to your point, has gotten a lot faster over the last five or ten years. Yeah, totally. Labor Day savings are happening now at the Home Depot with select appliances starting at$399.

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30:16Gemini and Chrome is here for it. Ready to make anything online make sense? There's no place like Chrome. Check responses set up required compatibility and availability varies 18+. Okay, so as we're kind of looking at retail companies and you're looking at earnings, What other things do you kind of look for to help you stay on track with the companies you own, as well as maybe look for things that could be good or bad? So this is one of those custom metrics I like, just to kind of give me a picture of how the company is investing. Obviously, they will say one thing maybe on an earnings call, but you want to double check with the numbers.