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S. Vaidya Nathan

SHOULD one invest in retail stocks? The high growth rates clocked by the players, the statistics that point to the rising levels in consumer spending and the growing demand for a superior shopping experience combine to make a strong case for investing in the retail sector.

As most organised retailers are still at a nascent stage in the business, the view on the high growth rates reported needs to be tempered.

Sustainable growth rates are likely to settle lower.

There are risks associated with investment in retail stocks.

The retail sector rides on a booming economy and may be among the first affected by a drop in consumer spending during a recession.

Expansion of stores and promotional efforts such as sales during festival seasons as well as off-season have to be well-timed; else they may adversely impact sales growth and profits as retailing is fairly capital-intensive.

Here are some parameters to evaluate retailer performance:

Same store sales: This measures the growth in sales of existing stores, which is a better reflection of the retailer's performance.

It points out to the retailer's continuing ability to attract customers, even as competition increases.

Revenue density: It is the sales per square feet and indicates the efficiency with which retail space is utilised.

Efficiency in inventory management: A quick way to estimate this is to see if inventory growth lags sales growth.

Operating margins: These vary according to the retail format. Grocery retailers typically have low operating margins. Private labels would boost margins, be it grocery or apparel retailing.

Licensing vs ownership: Licensing of property as against ownership allows for quicker expansion without imposing strain on resources.

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