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12/16/2011 12:59:30 AM
(Written by Rebecca Lipman. ROE data sourced from Google Finance. All other data sourced from Finviz.)
According to a report from the Commerce Department, US retail sales rose less than expected in November, bruising assurances of a strong shopping season. Some retailers were hit worse than others thanks to some heavy price slashing that cut into profit margins.
Best Buy is one such company who may have laid the discounts on a little too thick… The company’s quarterly profits missed Wall Street Estimates prompting shares to drop 11% on the news.
November retail sales only grew by just 0.2%, missing economists’ expectation of 0.6% growth.
CNBC reports retailers are seeing sales dry up halfway through the holiday sales period, according to a consumer survey completed Sunday.
To keep sales up retailers may continue piling on the discounts. “The trend may force discounts as deep as 70 percent on coats and flat panel TVs as Christmas Eve approaches.”
If heavy price cutting is the best tactic for sales, Reuters argues that it poses a “worrisome longer-term scenario for Best Buy and other brick-and-mortar chains with massive investments in infrastructure and major efforts to increase the service side of the business.”
In that sense, brick-and-mortar chains face fierce competition from online retailers like Amazon.com (AMZN) who don’t worry too much about infrastructure investments, or big discounters like Wal-Mart (WMT) and Target (TGT). that have a business model centered around low profit margin goods.
More Last Minute Discounts?
It may be hard to believe, but according to the America’s Research Group/UBS Christmas Forecast Survey, 40% of consumers are completely done with their holiday shopping at this point.
“What’s more, only half of consumers hit the malls this last weekend, meaning those that are left are sitting on their hands awaiting bigger mark-offs, the survey showed.”
With less than 12 days left for Santa to begin his delivery route, do you think retailers will give in to consumers’ demand for bigger discounts?
To help you find retailers who might buck the low profit margin trend, we compiled a list of US retail stocks and screened the names for high levels of profitability as determined by the DuPont analysis.
One of analysts’ favorite profitability tools is DuPont analysis. It’s a way to look at changes in return on equity (ROE) profitability [i.e. net income/equity] by attributing those changes to certain sources. Some of the sources are more sustainable than others, thereby giving an analysis of strength in increasing profitability.
DuPont analysis breaks up a company’s ROE into three components: net margin, asset turnover, and leverage. Companies with increasing ROE along with increasing net margin, increasing asset turnover, and decreasing leverage are viewed favorably.
Do you think these retail companies are operating well? Use this list as a starting-off point for your own analysis.
Analyze These Ideas (Tools Will Open In A New Window)