This document provides an overview of key factors to consider when researching a retailer for investment purposes. It discusses important margins like gross and profit margins that determine a retailer's success. It also covers important balance sheet items like debt, cash, and assets. Revenue recognition and warranty provisions are explained. Popular financial metrics for retailers like sales, average ticket size, and average selling price are outlined. Non-financial metrics like number of employees per store are also discussed. The importance of identifying trends in key financial ratios over time is highlighted for evaluating a retailer's performance and valuation.

1. Your simple guide to researching a retailer for
Investment purposes

2. First the basics
A retail business must have these essential ingredients:

3. Next, we spot the margins
What margins?

4. The margins that determines a retailer’s future in the
marketplace. There’re two such margins:

5. Important margins
They tell us these things:
Gross margins – able to source goods below the price.
Profit margins – able to source goods and pay for all other
operating expenses like distribution, selling, keeping the
lights on and salaries below the selling price.

6. Looking at the Balance Sheet
For retailers, three things to keep an eye on:

7. First up, debt
WHEN DEBT IS GOOD ON
RETAILER’S BALANCE
SHEET:
1. Tangible assets exceeds its debts.
2. If you’re a start-up, but the business needs to be exciting
(look for social media chatter of this new start-up for
possible success).
3. It is used to acquire new businesses that are compatible;
drives cost-savings and cash-generative bought at a fair
value.

8. WHEN DEBT IS BAD ON A RETAILER’S
BALANCE SHEET:
1. If retailer borrowing year-after-year without making a
cash profit.
2. A retailer has no asset-backing (most intangibles and
goodwill) to pay-off the debt.
3. When interest costs exceed operating profit.
4. Buying businesses that don’t meet the retailer’s goals, and
produce no cash savings.

9. Why cash is king?
to prove business model is
working.
Retailers needs
Retailers needs to return money to shareholders.
Retailers needs to re-invest in existing
business and to grow its
operations.

10. Assets, the source of retail success – part 1
Investors can be confused when it comes to judging the values
of assets on a retailer’s balance sheet.
Why is that?
In retailer’s assets are valuable, even
goodwill has value, as the acquired
businesses generate cash.
But when business is retailer’s assets are not that
valuable!!

11. Assets, the source of retail success – part 2
Which assets can you count on when times are bad for a
retailer’s operations?

12. Assets, the source of retail success – part 3
Which assets will not be valuable when times are bad for
a retailer’s operations?

13. Revenue recognition
A topic that novices don’t understand, unless they have experienced
investing, or run a business.
So, why is revenue recognition important and what you should paid
attention to?

14. When a transaction takes place the customer either pay by
OR
Both gets recorded as Sales.
Cash sales is recognised immediately, but credit sales is recorded
as a trade receivable (under ‘current asset’) on the balance sheet.
As soon as the customer pays back the debt, then trade
receivables get decreased, and the company’s cash balance
increased by the same amount.

15. Sometimes, customers can’t pay back what it owes. Then the retailer is forced to
it off as lost sales, or an expense in the Income Statement.
It means previous years sales were over-stated. How do investors guard
against businesses reporting liberal sales?
Here are some general rules:
1. If Trade Receivables growth grows roughly the same as Sales growth
then sales are good and sales write-off is kept to a minimal.
2. But if Trade Receivables growths exceeds Sales growth, year-after-
year, then we should question if the company’s sales can be collected, or
would it be written-off as ‘lost sales’ in the future.

16. Retailers selling durable goods like laptop, cars, washing machine,
etc. needs to provide customers with a guarantee of a replacement
over an agreed upon period.
That period can be two, three or five years.
But retailers are allowed to record products sold as sales, but it must
record something in return and that something is known as a

18. A warranty for a retailer is a provision (under the current liability and
non-current liability) on the balance sheet.
The company using its experience will estimate a percentage of sales
that is likely to be replaced.
Therefore, the retailer will set aside a specific amount as provision to
compensate for replacement.
After 2 years, the accounting rules are:
1. An increase in provision from the previous year means an expense
get recorded in Income Statement.
2. An decrease in provision from the previous year would contribute
to net profit.

19. When it comes to retailing it is important to be
notice and be able to connect with people.
That is why retailer wants to built their own
personal

20. The ‘brand’ is your friend
Brand retailers are retailers loved and admire the world over.
Brands like Apple, Cola-coca and, Burberry stands out from the crowd.
A brand retailer tell its goods and services because they’ve these characteristics:
STYLISH

21. TRENDING
Perform
And having a must
have product wanted
by consumers

22. Most retailers are distributors of famous brands
Retailers such as
1. Department stores, or big box stores;
2. Grocers like Wal-Mart and Tesco;
3. Online retailers like Amazon;
4. Electrical stores like Best Buy and Dixons;
5. Mobile phone retailers like Verizon and Vodafone.

23. Popular financial metrics for retailers
1. SALES, a measure of same stores sales
opened for more than a year.
2. per tells us the average amount of goods
purchased.
3. Average selling price per item (a metric use from non-food
metric).

24. Popular non-financial metrics for retailers
The following non- financial metrics are used to measure retail
efficiencies:
1. PER
2. Sale/ No of employees; - some companies provide statistic for
‘full-time’ equivalent employees.
3. PER

25. Popular non-financial metrics for retailers
4. Annual rent, electricity and utilities bills, as a % of sales
5. PER Follower

26. When researching, which retailer to invest in,
we need to understand the importance of
TRENDS

27. The importance of trends
Singular data is meaningless because it doesn’t tell the whole story of the
performance of any company, and, in any sector, not just retail.
Identifying a retailer’s financial trends is studying its:
1. BUSINESS
2. MARGIN
3. PROFIT/STORE

28. The importance of trends
General rules
1. When cycles peak, the retailer tends to be overvalued.
2. When cycles trough, the retailer tends to be undervalued.
But, in reality business cycles can peak for a sustainable period of
time, causing earnings to grow and reaches new peaks (CLICK TO
TWEET)
When business cycles trough it can do so for a quick period, before
growing again, or its in sustainable decline.

29. Examples of financial trends
These are some of the ratios used to identify a retailer peak cycle
and trough cycle:
1. P/E ratio;
2. ROE, ROCE, operating margins and EBITDA margins;
3. Debt to equity ratio;
4. Revenue growth/contraction cycle (please excludes
discontinued operations);
5. Earnings yield;

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