How to spot a dud retailer

Founder and Chief Investment Officer of Montgomery Investment Management
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A discretionary retailer has a life cycle that is reasonably (but not 100%) predictable. This allows investors to form a view of the future, and hence, determine a valuation. The complexity of some businesses on the share market would make any projections meaningless, and when you are unable to make confident assumptions, how can you confidently invest?

With this in mind, retailing as a business model is really dependent on just a few key metrics. How many stores does the business have open? How many stores can be opened? How much can sales grow within each store? And, can margins be maintained?

This may seem simple, but understanding these main drivers of a retailer can be powerful in forming investment decisions. When these key metrics align positively, it often translates into strong earnings and hence a positive share price response. The reaction can be just as powerful in reverse, due to high fixed costs and operational leverage. Carefully watching these metrics can therefore help an investor capture the upside and potentially avoid the downside.

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