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Is Traditional Retailing Dead?

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I’ve found over the years that retailing is a sector where value investors have trouble generating returns from.

Consider Buffett’s comments:

“I think retailing is just too tough for me, just generally,” Buffett said.

“We bought a department store in 1966, and I got my head handed to me. I’ve been in various things in retailing. …

I bought Tesco over in the UK and got my head handed to me. Retailing is very tough, and I think the online thing is hard to figure out.”

In 1993, Warren Buffett acquired Dexter Shoe Company with Berkshire Hathaway’s stock. Dexter was earning $40 million per year pre-tax. However, it soon suffered from declining sales from increased competition and later winded down its operations in the US.

In 2008, Buffett told shareholders that Dexter Shoe Company was one of his worst mistakes. The stock Buffett used to pay for the company would be worth more than $5 bil [in 2008 – and considerably more today].

As Buffett told Reuters – “To date, Dexter is the worst deal that I’ve made,”.

Other investors don’t find it any easier

Other value investors face similar challenges. Sears Holdings was a company that was pitched frequently as a “value holding” because of its substantial real estate property.

FY 2016 FY 2017 FY 2018
Revenue $25,146 $22,138 $16,702
Net Income -$1,000 -$922 -$934

Sears was the “Amazon” or “Walmart” of its time.

Today, Sears is a shadow of its former self. Its physical outlets are in serious decline, sales are plunging and stores are closing. It has sold some of its core brands which once could only be found in its stores such as Kenmore appliances and DieHard Batteries to generate cash.

None of this has been enough to stave off decline.

Consider what Francis Chou, manager of Chou Funds said in his 2017 Semi Annual Report,

In hindsight, our initial assessment of Sears Holdings being worth more than $50 per share a few years ago was most likely too optimistic.

This is taking into consideration that we received in excess of $23 per share in distributions from various spin-offs and right offerings, which we later sold in the stock markets.

Singapore retailers aren’t having it any easier

Source: Today Online

Once dominant retail giants like John Little have shut down their departmental stores in Singapore. Other incumbents which are still in operations face declining sales.

Retailing has always been vicious. As highlighted in the previous post on H & M, brands are coming in or falling out of fashion all the time.

What is unique in the last decade is the rise of eCommerce. The huge influx of capital into “disruptors” has upended the landscape as we knew it.

The fact that venture capital and private investors are willing to continue finance loss making operations in an effort to get market share have generated intense pressure on existing incumbents.

Our Take:

The gloom and doom in the traditional retailing sector is well founded. The industry is facing a seismic shift both what people buy – and how they buy it. Although valuations may look superficially cheap – we urge caution especially when considering the future earnings power of the business.

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