Is Oroton Australia’s best retailer?
Oroton, JB Hi-Fi, The Reject Shop, Woolworths, Nick Scali, Cash Converters. If you have seen me on Sky Business or visited my YouTube channel recently, these names will be familiar. David Jones, Country Road, Harvey Norman, Myer, Super Retail Group (think Super Cheap Auto), Strathfield Group (Strathfield Car Radios), Noni B and Kathmandu also spring to mind, albeit for different reasons.
As a business, retailers are relatively easy to understand. The best managers are easy to spot (think Oroton’s Sally MacDonald) and it is also easy to separate the businesses with earnings power from those without (compare JB Hi-Fi and Harvey Norman).
But generally speaking even the best retailers may not be companies you want to hold forever. Why? Because they quickly reach saturation and so must constantly reinvent themselves.
Barriers to entry are low. There are always new concepts with young, intelligent and energetic entrepreneurs eager to develop a new brand and offering. Big red SALE signs are replacing mannequins as permanent window fixtures in Australian shop fronts, driving down revenue and margins. And for those who choose to defend brand value, sales revenue is also often sacrificed.
Then there’s the twin-speed economy, a string of natural disasters, soaring oil prices, growing personal savings, higher interest rates, Australia’s small population and one that is increasingly adept at shopping online for a getter price. Hands up who wants to be a retailer?
Retailers are attractive businesses – at the right price and the right stage in their life cycle. So, in retailing, who is Australia’s good, bad and just plain ugly?
Remember, these comments are not recommendations. Conduct your own independent research and seek and take professional personal advice.
ASX:HVN, MQR: A3, MOS: -19%
A decade ago Gerry’s retail giant earned $105 million profit on $484 of equity that we put in and left in the business. That’s a return of around 19 per cent. Fast-forward to 2010 and we’ve put in another $117 million and retained an additional $1.5 billion. Despite this tripling of our commitment, however, profits have little more than doubled to $236 million. Return on equity has fallen by a third and is now about 12%. One decade of operating and the intrinsic value of Harvey Norman has barely changed. HVN is a mature business, but be warned… Harvey Norman is what JB Hi-Fi and The Reject Shop would see if they used a telescope to look forward through time.
ASX:ORL, MQR: A1, MOS: -21%
Sally MacDonald is a brilliant retailer. I highly recommend watching this interview – click here. Sally took over Oroton in 2006. In just five years she has cut loss making stores and brands, sliced overheads, improved both the quality and diversity of the range. The result? Surging revenues and return on equity in 2010 of circa 85 per cent. Try getting that in a bank account or even a term deposit! Asia offers even brighter prospects for Oroton while their product offering is sufficiently attractive and appealing that the company has the ability to weather the retail storm and protect its brand.
ASX: WOW, MQR: B1, MOS: -17%
You don’t get any bigger than Woolworths (its one of the 20 largest retailers on the planet!). It has a utility-like grip on consumers only, with earnings power that would put any utility to shame. The latter can be seen in the near 30% annualised increase in intrinsic value. Competitive position and size means suppliers and customers fund the company’s inventory. Challenges included professed legislative changes to poker machine usage (WOW is the largest owner of poker machines and any drag in revenue will have an exponential impact on profits), and the rollout of a competitor to Bunnings.
David Jones Limited
ASX: DJS, MQR: A2, MOS: -35%
A beautiful shop makes not a beautiful business. I remember when David Jones floated. Shoppers who enjoyed the ‘David Jones’ experience and were loyal to the brand bought shares with the same enthusiasm as scouring the shoe department at the Boxing Day sales. Since 2007 DJS has reduced its Net Debt/Equity ratio from 108 per cent to just under 12 per cent. We are yet to see if Paul Zahra can lead DJs with the same stewardship as former CEO Mark McInnes but as far as department stores can possibly be attractive long-term investments, DJs isn’t it.
ASX: MYR, MQR: B1, MOS: -27%
In 2009, following the release of that gleaming My Prospectus, I wrote:
“With all the relevant data to value the business now available and using the pro-forma accounts supplied in the prospectus, I value the company at between $2.67 and $2.78, substantially below the $3.90 to $4.90 being requested [by the vendors]. It appears to me that the float favours existing shareholders rather than new investors.”
My 2011 forecast value for Myer is just over $2. According to My Value.able Calculations, Myer will be worth less in 2013 than the price at which it listed in September 2010. If competitors like David Jones, Just Jeans, Kmart, Target, Big W, JB Hi-Fi, Fantastic Furniture, Captain Snooze, Sleep City, Harvey Norman, Nick Scali and Coco Republic were removed, Myer may just do alright.
ASX: NBL, MQR: A2, MOS: -51%
Noni B’s intrinsic value is the same as when Alan Kindl floated the company in 2000 (the family retained a 40% shareholding). Return on Equity hasn’t changed either. Shares on issue however have increased 50 per cent yet profits have remained relatively unchanged.
Kathmandu Holdings Limited
ASX: KMD, MQR: A3, MOS: -56%
Sixty per cent of Kathmandu’s revenues are generated in the second half of the year. Will weather patterns continue to feed this trend? I sense premature excitement following the implementation of KMD’s newly installed intranet. The system may streamline store-to-store communications, reducing costs and creating inventory-related efficiencies for the 90-store chain, however what’s stopping a competitor replicating the same out-of-the-box system?
ASX: FAN, MQR: A3, MOS: -24%
Al-ways Fan-tas-tic! Once upon a time it was. Low barriers to entry are seeing online retro furniture suppliers like Milan Direct and Matt Blatt are forcing Fantastic and other traditional players to reinvent the way they display, price and stock inventory.
ASX: BBG, MQR: A3, MOS: -49%
Billabong’s customers are highly fickle, trend conscious and anti-establishment. Like Mambo, as one of my team told me, Billabong is “so 1999 Rog”. Apparently Noosa Longboards t-shirts fall into the “cool” category, now. Groovy!
Eighty per cent of Billabong’s revenues are derived from offshore. Every one-cent rise in the Australian dollar has a half percent negative impact on net profits. Fans of the trader Jim Rogers believe the AUD could rise to USD$1.40! Then there’s the 44 stores affected by Japan’s earthquake (18 remain closed) and another three in the Christchurch earthquake.
ASX: CTY, MQR: A3, MOS: -63%).
Like the quality of their clothing, Country Road’s MQR has been erratic. So too has its value. Debt is low however cash flow is not attractive. Very expensive.
ASX: CCV, MQR: A2, MOS: +26%.
Value.able Graduates Manny and Ray H nominated CCV as their A1 stock to watch in 2011. Whilst its not yet an A1, Cash Convertors is a niche business with bight prospects for intrinsic value growth.
Other retailers to watch
I have spoken about JB Hi-Fi, Nick Scali and The Reject Shop many times on Peter Switzer’s Switzer TV and Your Money Your Call on the Sky Business Channel. Go to youtube.com/rogerjmontgomery and type “retail”, “JBH”, “TRS” or “reject” into the Search box to watch the latest videos.
In October 2009 the RBA released the following statistics:
16 million. The number of credit cards in circulation in Australia;
$3,141. The average monthly Australian credit card account balance;
US$56,000. The average mortgage, credit card and personal loan debt of every man, woman and child in Australia;
$1.2 trillion. The total Australian mortgage, credit card and personal loan debt;
$19.189 billion. The amount spent on credit and charge cards in October 2009.
Clearly we are all shoppers… what are your experiences? Who do you see as the next king of Australia’s retail landscape?
Posted by Roger Montgomery, author and fund manager, 12 April 2011.
Testing. Fails to accept comments.
Actually Roger my nomination for the A1 stock to watch in 2011 was CST, not CCV.
I know it doesn’t fit with your retailing theme, but a European company seems to agree with me somewhat, lobbing a low-ball offer for CST in the form of a scheme of arrangement. Unbelievably, the CST board are recommending the offer.
interesting discussion. You said:
“One thing Roger has said, is that you can’t reduce risk by increasing the RR. Only value and invest in top quality companies.”
Correct. But altering the RR is not about increasing or decreasing risk. It is meant to be your own personal assessment of how risky a company is. Even a fabulous business, well run, with amazing management, and good prospects going forward can still be very risky. I have my MCE RR at 15%, to account for the fact that it is a small comany, in a competitive space, in a growth phase and hence untested in their new capacity and so on. Whereas say WOW I have a RR of 10% because they are huge, well established, non-cyclical, non-discretionary, and with a proven record. Both great companies but different RR’s to adequately reflect their positions.
My take on the purpose of the RR is to ensure you know how much risk is involved and can hence demand a higher return to 1. Reward that extra risk, and 2. ensure you don’t have too much invested in it.
The MOS is applied on top just in case you are wrong about anything.
To give you a further example, banks when giving out loans use RR all the time. They can lend you money at 7% on your home as you have a 20% deposit and your home is the collateral. The risk is low. An unsecured personal loan, however, will be lent at 14%. The risk is much higher, but that doesn’t mean the practice of these loans is bad business. By requiring a higher return on these loans they are compensating for the FACT that a percentage of these will default and be unrecoverable. But by crunching the numbers they can ensure that their profit margin on riskier loans is just as good as the safer ones.
I just find the practice of some people to just apply a RR of 10% to everything and adjust their MOS according to how risky it is to be not quite the way we should look at it. In reality though, if you do that you will probably end up in the same boat as everyone else but it just doesn’t seem ( intellectually ) the right way to go about it.
Messed up. This is in reply to:
Posted by Jarrod on April 14, 2011 at 2:00 am
and should be read after his comment there.
I agree Sav
Using one RR is a bit too simple in my humble opinion. I would rather estimate IV to the best of my ability and then place a MOS on that – knowing full well that I’m fallible
you forgot to mention RCG
THE ATHLETE’S FOOT
NO DEBT AND GROWING IN A GREAT NICHE
My number one global retailer would have to be Tiffany & Co. The store is amazing. You go in there and all you see is loads of people (mainly women) who are looking at what gift they want next from their boyfriends!!
I know, I just recently purchased a necklace for my girlfriend and she absolutely loves it. Has hardly taken it off since. They have been around forever but their jewellry is young and fresh and priced at the right amount so that it hurts when you buy (but not too much). Quite a few of my female friends have 3, 4, 5 jewellry items and counting. Something about their brand seems really unique and hard to replicate! Just my thoughts.
Ezcorp with its capital contribution enabled Cash Converters to increase its loan books but more importantly buy franchise operated stores. From an accounting perspective, Cash Converters in the UK lost $0.27M as it rolled out its finance business. It also opened 7 new stores which are always loss making to start. Some analysts have reported that it may take up to 3 years before a store matures and becomes profitable. As the UK network of stores mature, I expect that there will be substantial growth.
The next big retailer in Australia doesn’t own a store. LOL. I refuse to go back to DJs and Myer after the horrendous service I received during the last sales. When retailers’ top line falls, the biggest discretionary cost they have is REM (short for remuneration), ie the staff get the chop and they wear the bad service. I believe it’s what Coles management did to achieve the aspirational $500m target set by John Fletcher in the last days of CML, and the queues in the stores got longer.
I know which brands I like, I know the sizes and I can buy them cheaper with better range on line from the US.
Having said that, I still own Oroton shares, bought during the GFC and I will be looking closely at the IPO of Harris Scarfe. They are turning around well and lead by a good retailer.
Oroton needs to change the product design to succeed within Asia. Someone else nominated that they also needed an ambassdor. The reasons underpinning this is the average middle income Chinese citizen is driven towards western capitalism and the way of life, if you get someone to push for a brand, it will push product out of the stores. The tastes of the Chinese people also differ; Oroton’s designs are subtle and suave. However, the average Chinese consumer in Oroton’s target market has tastes that demonstrate affluence, wealth but most importantly they have a HUGE sense of pride – generally speaking. they’re all after the proverbial ‘$ sign hanging from their neck’ type thing. Just look towards Chinese culture and you will find alot of it is based on superstitions, luck and wealth. Oroton are in the right space, lets hope they can push it.
Why does LV do so well in China? the brand is synonymous with wealth, well known and the ‘logoing’ is brash.
my 2cents. I’m from the region and of course speak in general terms.
Just some of my own thoughts.
I would definitley shy away from oroton changing its design. it would cease to become Oroton and would instead just start being a cheaper LV or Gucci ripoff. This would cause more harm then good.
The thing is, that oroton are not in the same market as LV. They are luxury but affordable luxury and that is there niche. I am not 100% on the demographics in China, Singapore etc but i think an affordable brand that presents the luxury image which Oroton does well will have a market.
Oroton’s latest result was very poor.
Revenue and Profit struggled to reach last year’s figures despite the opening
of several new stores.
Also I bought a travel clock which was quite expensive and is not of very good quality. Cheap Chinese!
One stock market service does not rate Oroton as a high quality stock.
If Coca Cola can sell water, Sally McD can sell hand bags to women in asia
Someone wrote that they are not that impressed with the current retail stocks in Australia. Something that I’ve noticed which is kinda interesting as an investor is the advantage you can have at spotting great retail companies in the US (where I’m originally from). When you live there, there is a real buzz which helps you pick up on certain trends and products/stores that are becoming successful. You do not get that in Australia as much….I think it has to do with Australian’s culture along with many other factors. Even watching TV in the states I’ve now noticed how good they are at selling products recently in ads compared to Australian commercials.
One company that I’ve just read something about is GUD which is starting a new line I think called Novo. They had trouble starting a new line a couple of years back but I thought maybe with masterchef and sunbeam I wonder if they use the show as an advantage to start marketing their new line to drive more rev for next year…..just a thought.
You have now completly bamboozled me.
Eureka Report 23/3/11 Blog 12/4/11
WOW MOS -1% $8.09 WOW MOS -17% $8.43
] ORL MOS 3% $25.80 ORL MOS -21% $26.89
Prices are taken from charts on comsec site
There appears to be no announcements that would alter values much.
Could you please explain
Regards Ian Bowditch
Just demanding bigger margins of safety – not much of value in the market. You might remember from the very early days of the blog, I calculate two valuations concurrently. It was previously suggested that I post both but it is practically very difficult.
The inconsistency on the change to MOS for ORL is very confusing to us mere mortals, I was initially under the same impression that you may have had a discussion with Sally to revise your number. The huge variance and the comment “Just demanding bigger margins of safety – not much of value in the market” doesn’t really explain the change in valuation. Why move from 12 to 14% RR ? Really enjoy your comments and look forward to your detailed explanation on the change.as the breath of the change of 24% in Valuation is enormous
I really liked the comment below about Myer.
“If competitors like David Jones, Just Jeans, Kmart, Target, Big W, JB Hi-Fi, Fantastic Furniture, Captain Snooze, Sleep City, Harvey Norman, Nick Scali and Coco Republic were removed, Myer may just do alright.”
I think as it stands that is Myers best hope, they need a huge revamp. Everything about them at the moment is becoming a bit irrelevant in the marketplace.
The problem is that i don’t think they even know what they are trying to be so how on earth do their customers. Trying to please everyone doesn’t work.
If you’ve shopped at Myer, there’s a good chance you actually walked out after trying (in vain) to find a staff member to hand over some cash to. A friend works in a brisbane store and they are severely understaffed. Management would know this, the interesting part is how long the situation can continue..
In the retail space but not retailers per se, I really like the companies that provide the fuel that stokes the fire that is our love of shopping and retail therapy.
For this reason I really like CCP, TGA, FXL, CCV. I was a bit surprised (I’m a total retail novice!) when going to buy the better half some bling at a popular Jeweller to be told; ‘no worries mate you can put it on interest free with Cetergy’. Jewellery of all things!
Retail is an extremely tough gig ATM and rising costs of living (think fuel, electricity, rates etc) means discretionary spending dollars will become under even more pressure. Our expectations of immediate gratification however will mean we will look elsewhere (i.e. debt) to get our goodies.
Gen Y (and other Gens) have developed a habit of have now pay later that won’t abate with age I wouldn’t think. It also tempts us to spend far more than we otherwise would should the money be coming from our own sky-rocket.
Just my opinion. Disclosure: I own TGA & FXL shares. Cetergy is owned by Flexigroup.
SFH looks cheap but where’s the growth? The stores are everywhere. Maybe some growth from La Senza rollout.
Cheap but Cigar But at best, IMHO.
MLC down to 25c from 40c, in losses until 2012 at least.
my personal opinion is that none of the retail sector in this country excites me. most are either very expensive and/or future prospects are not so bright due to maturing markets/consumers high debt.
maybe when the new jb hifi or reject shops lists on the ASX i will get excited again…
One of the more interesting things about Zara is that they are perfectly happy for other companies to come and visit their manufacturing and production facilities, becasuse they are so confident that no other company can mtach them in terms of execution.
Its either an incredible competitive advantage or out and out hubris
i think it is unanimous Roger already. Zara (albeit not even opened yet) is the next king of the australian retail landscape.
Wanting to explain my thoughts on DJ’s that i mentioned earlier.
Also, i said i was a fan and think they do have a future but i didn’t say i am in any rush to buy them if the price is attractive and the below will point out why so i gues Roger is exactly right.
It is an interesting case and my thoughts get pulled from one side of the fence to another about them. This was even going on 5 minutes after i sent the first post. So for everyones enjoyment and for sake of getting it clear in my mind by writing i post “Andrews eternal DJ’s struggle” .
I think as people get more technologically savy the risk of online retailing will become an ever increasing threat. The world is only getting smaller and the net has given people access to many brands that they previously could only access by visiting the brands city boutiques or in DJ’s. This there for diminishes the customer base that DJ’s has previously had a hold over.
As the Australian dollar continues to get stronger against both the US$, GBP and EURO there will be greater bargains online by buying them direct from brands website store. I recently did this myself for my fiance and we saved a good $100.00 at least. If the main buying concern is price than the internet will win out. I will come back to this in another point. The problem with some online buying opportunities is that it might seem like a saving but could potentially be just as expensive as you may need to cover sales and duty taxes if the garment is over a certain amount, delivery costs, risk of damage in delivery, risk of mistake in the order etc.
One thing i like about DJ’s and retailers is it gives people the chance to analyse how they are faring by just walking in the store and my recent visits show that it is still business as usual and they are doing well. Looking out the back window they have been a great company as well.
One thing i realised in a visit to New York last year is that brands and stores which can offer more than just a marketplace and more of an experience and have a prestige about their name are just as relevant as ever. Bloomingdales and Saks were packed when i went in there. Australia’s equivalent is David Jones and some of there stores are up there with the famed NY dept stores albeit they don’t have the same worldwide recognition the brands they sell sure do. This means there is an intangible element that will work in David Jones favour. Going to David Jones can be/is an experience rather than a shopping trip.
Clothes are not a one size fits all product, people will need to try them on, see themselves in the dress or shoes before they decide to buy. you can’t do this on the net but i will concede you can do this and then buy that dress on the net. Some people also don’t want to wait for the delivery, they buy for an upcoming party and want to know they have the product before hand. Some just don’t like waiting at all. You also know what you are spending your money on, you know when you will receive it.
DJ’s product range is a great asset. People who know more about the fashion game then me will tell you that in good times people will buy more clothes and other wants, in bad times they will cut down on spending and instead of buying quantity they will buy that one quality outfit that they always wanted, this makes them feel better in a depressing economic climate. DJ’s is well placed to take advantage of both of these trends and the only other competitor for the quality outfits is the brands boutiques which can be intimidating for some and not easily accessible. The problem here is that a high australian dollar will mean that one can buy quality and still save money during the tough times although.
Fashion and buying fashion is not a logical process, its an emotional one. This places the stores in favour who can play to this in a way the net cannot. I have seen pictures of some stores with a mirror on the mannequin as a head so the person can see themselves in the dress.
As you can see i’m evenly balanced on whether the company is an investment quality company or if there are concerns about future prospects and should be avoided through my logical analysis. My gut says they will be a good company. They will need to innovate a bit and put up a decent online offering however (see saks and bloomingdales again, even though they do not ship dresses to australia).
I think there are challenges, i think some stores should be closed (including my local one), and an element of re-invention will be needed. Some product lines should possibly be cut but at least out of David Jones and Myer, David Jones has a future that you can see.
At the moment I am sitting on the sidelines and happy to wait it out and see which one of my trends starts becoming the more powerful one but as i said, i am a fan of their model and believe they will have a good future.
Brian Mc Erlean
Hi Roger abd bloggers
Great post as it affirms everything value investors are about. Buffet talks about being able to walk away and come back in 5 years time. I believe WOW fits the bill with it’s mix of property and retail. I graph its EPS every year on a log graph and it’s steady as she goes. You sleep better by ignoring the nosie of the market.
I also hold ORL and JBH but watch them closely as I don’t regard them as sleep at night stocks.
You just cannot beat stocks with high ROE, low Debt/Equity in the right industry, bought as at a discount to their value. It sounds so simple. I have read another Buffet book and I am convinced he is just a very patient bargain hunter. I have checked the year highs and lows for my top twenty stocks and have been astounded by the differnce – 78% in the case of FWD.!
Even WOW has an 18% spread between the year high and low. I find the patience required to wait for what looks like the year low the hardest part of investing. It is just so important when you have identified the right stocks. Waiting is tough.
We finally got our family company off the ground and we cannot buy a single stock at present becasue none have dropped to the strike prices. It is just so important to buy at a discount. The vulture technique is a tough one – patience is a virtue that does not come easy in this camp. Keep up the good work. Please profile other industries. You have done such a good job with retailing.
Great post Roger.
Retailing is always exciting. We had a garage sale 2 weeks ago. My wife and daughter both had an exciting day being a ‘retailer’.
The statistics from RBA is interesting. My only comment is as we move to a generation of using cards rather than paper money, it is worth considering the mix of spending. Personally, my credit card balance has more on necessities (e.g. food, groceries, childcare, toll) rather than discretionary (e.g. clothes, toys, etc).
Also, I am recently ‘in charge’ of the groceries shopping and inflation is alot worse then I expected. The only thing cheap at the moment are TVs.
So I think retailers’ real challenge is the change in consumer behaviour rather than just competition with online.
On who’s the next king, I think whoever that has the best value proposition (that is high quality products at low prices) wins!
Love CCV. But getting a bit edgy/nervous about my (small) TRS holding. I did what good MDs(Montgomery Disciples) should do, and when the price of a (good) company fell, bought a few more. But I’d like them to post some announcements/results soon to give me a little assurance that they’re getting on top of their recent woes.
Any MDs that recently have sold their stake, need to front up here and ‘confess’ – you are sinners.
I’d add in another step that what good “MD’s” should do after the price of a good company falls:
Recalculate intrinsic value and if this continues to be at a significant discount to the current price, then go ahead and buy more.
Sometimes the price falls for valid reasons and intrinsic value will also drop, at other times the price falls when there has been no appreciable change in intrinsic value – this is when we should top up our holding.
And always keep an eye out for whether there has been any change in the company or marketplace that will cause the competitive power of the company to be less and cause future intrinsic value to drop. Not sure if this is the case for TRS but thought i’d add it.
Don’t worry about the market Kim, just worry about the company, that is what is important.
unfortunately not enough safety margin with reject shop. under $10 will be attractive…
good luck with it, but i do hope share price tanks! sorry…(I’m greedy)
They may not be king of retailers, but Specialty group (SFH) are certainly right up there in my book in terms of compelling value right now. Recent ROE figures are distorted by accounting anomalies however based on free cash flow metrics my valuation is $1.40. With the Senza brand being rolled out I don’t see prospects being as gloomy as Mr Market and a near to 8% FF yield will help me wait until price re-attaches to value.
Yes Oroton is Australia’s best retailer and JB HiFi is probably second before it drops away into a group of companies that I generally wouldn’t invest in.
With regards to CCV I did some quick calcs and came up with the following using forecast EPS and DPS from Etrade:
EQ 0.43 0.47
ROE 17.5% 17.5%
POR 50% 55%
RR 13% 13%
IV $0.65 $0.71
I can’t really make a case for them off this data but I could always have it wrong.
Most of the retailers appear expensive still even as the media constantly bemoans and harps on about the lack of retail spending by consumers.
The only one I am really keeping my eye on is SFH. The have a variety of brands (Katies, Millers) which cater to the ‘value’ end of the market. The ROE is still solid but its the growth prospects that are keeping me from investing. Unless spending picks up and forward EPS estimates improve then it isn’t exactly going to shoot the lights out. Figures from Etrade again
EQ 0.32 0.367
ROE 35% 35%
POR 60% 63%
RR 13% 13%
IV $1.25 $1.41
I can’t help but think some people are very misguided on the RR to use in their calculations of IV. I am interested know if someone is to use an RR of 13% for say CCV, are they going to consider buying in at that IV price, or wait for the price to be at a certain discount to it?
Myself personally, I am inclined to use the bond rate, plus an amount for inflation, plus an amount for risk. ATM, I am comfortable using around a 10% RR, and then looking for a buy in price around 40% discount to this. I stagger my purchases in case I am a little wrong and the price falls further and I buy more.
I can’t help but think some of these RR’s being used are too high and will be causing people to sell out way too early.
Perhaps Roger would be kind enough to post his thoughts on RR.
Thats what my book is for! I have written of some of the considerations required when determining the investor’s required return.
I don’t think it is a case of people being misguided rather people coming up with their own ways of measuring it and this is just normal cause everyone is different.
I vary RR’s depending on the company with 10% being the lowest i will accept and only for a few companys. I will wait for them to be a discount to the IV using those RR’s.
I measure the same things as you as i believe most here do but the way each of us measures it is different.
If a company i am looking at doesn’t reach the point i want it too i will not buy it, I want the company to justify buying to me and not me try to justify buying the company by assuming a lower RR.
i don’t think there is such a thing as selling too early, as long as it is based on a rational decision than the selling decision is right whatever the share price does after it.
I have never lost money selling early but I have when selling too late. I think a RR of 13 for CCV is OK. I use a RR of 15 for SFH. I buy at a discount to my IV’s and obviously the bigger the MOS the better. Also the future prospects must look good. I purchased Roger’s book to learn when to sell and how to identify good and bad businesses and it has been a big help.
Hi Guys, thanks for the replies.
I guess what I’m trying to say is that it appears to me that a lot of people use a higher RR when they think a company may be a little riskier than another. One thing Roger has said, is that you can’t reduce risk by increasing the RR. Only value and invest in top quality companies.
To me, the IV calculation is all born from the ROE of the company. A company with a high ROE gets a multiple from the table that is higher than a company with a low ROE. Of course, the investors RR will determine how big or small that multiple from the table is. Everyone is most likely going to have differing ideas on their RR, which is fine. But I feel that some people maybe building in a MOS to their RR.
This multiple along with other things such as Equity per share and payout ratio then determine the investors believed IV of the company. At this point, is when I believe the MOS should be applied. A larger MOS if I’m a little iffy about the company’s IV and a smaller one if I’m more sure of the company’s IV.
As I have posted earlier, I like to keep it a little more simplistic, by determining my RR from say, a risk free rate + inflation rate + a risk asset amount. This is applied accross the board for every company I value. Then I apply my MOS discount to the IV.
For me, I do not have a problem with this method, as I only apply it to companies that I have assessed as being lower risk based on quite a number of factors and ratios.
These are of course my thoughts, and I am quite happy to receive any feedback positive or negative. After all, you never can stop learning.
Pat – I would be interested in hearing your reasons for an RR of 13 for CCV, and an RR of 15 for SFH.
I agree with what your are saying here Jarrod. I think its a symptom of people going out and wanting to calculate the IV for every company and focusing on this part of the method.
This means that people are forced to adopt a particular RR for a company even though it is not quality, this blurs the lines.
My determination of the RR does not really take into account the actual company, by working out the value i have already decided it is a quality company. Any company that doesn’t match my determination of quality gets a stamp of NN2V (no need to value).
I will agree with yourself and Roger, you cannot reduce the risk by adopting a higher RR. A bad company will be bad whether you can buy it with a 10% or 100% RR. We should only be focused on finding the quality companys and working out the values for them. Saves a hell of a lot of time as well.
That said, if a company is a quality company than it will still be a quality company regardless of the RR you set and there for the only thing to think about is what is right for the individual.
I have used information in Value.able to create a method of determining RR’s. A number of people on the blog have stated that they use 10% for everything but I have not joined that method at this stage. I believe the ‘discount rate’ for CCV is slightly above 12% and for SFH it is slightly above 15%. Therefore my RR for CCV is above the discount rate and for SFH my RR is below the discount rate. I am not sure if my RR’s are good or bad, time will tell.
Note: I think Roger mentioned in Value.able that he does not like the ‘discount rate’ because it uses ‘beta’.
Great stuff. For clarification, its the WACC that I have an issue with – the Weighted Average Cost of Capital, which is the sum of the cost of equity and the cost of debt. The cost of equity is estimated using the CAPM (Capital Asset Pricing Model), which in turn has Beta as one of its inputs.
I should have referred bloggers to pages 191 & 192 of Value.able.
Get Stuff Pat,
You have really grow as an investor and you should feel very proud of yourself.
Again, Well done
I am still re-reading bits of Value.able and I am still learning from it. The significance of some of the things in the book starts to sink in the more I use the methods. Everything I do is still a ‘work in progress’. I am definitely putting more time into researching businesses but ‘when to sell’ has always been my big weakness so the real test of how much I have improved is still to come. I have thought for a while that many in the finance industry treat their small clients like ‘lambs to the slaughterhouse’, hopefully I am no longer one of those lambs.
Everything everyone does should be a work in progress.
As I said you should be very proud of yourself
I’m in total agreement you. Increasing RR to account for higher risk just results in putting a margin on a margin once an MOS is applied and makes it harder to compare potential purchases between shares when different RR’s have been used. The problem is further exacerbated but the fact that IV does not vary in a linear manner with RR but does with MOS making the overall ‘safety margin’ difficult to decipher.
About staggering your purchases….I think this is a good idea.
I invested in 7 companies over a few days in mid Feb 2009, thinking they had fallen way below what any reasonable person would think they were worth (although this was pre RM so it might be debatable).
However, some 4 weeks later my money had halved, and given I’d used 25% margin, I was seriously under the pump. I’d worked on my wife all through 2008 preparing for this investment project and I was close to being forced to sell, and with the other 75% coming from the mortgage (down Roger, down) having to explain myself on the home front – failure, penury, and possibly divorce – was not exciting me.
Luckily early/mid March was the nadir and my (our….sorry darling) fortunes turned around.
Back to the point – the staggered approach to purchases was actually suggested to me by a friend (a non-investor) whose council I sought during this period. I think it has merit. It certainly would have saved me some indigestion two years ago.
Ahem – I don’t condone the use of 25% Margin/75% Mortgage to fund a share investing strategy, so don’t try this at home…kids!
Roger, this is one of the best articles you have ever written. My response is yes ORL is the best retailer, MQR A1 + 85% ROE. My wife recently chose an Oroton bag for an anniversary present, the store was packed. (BTW Roger, did you get my email I recently sent you?) BelloWood.
I find it interesting that many people on this blog have said that when they visited an Oroton store, it was packed.
I have been to Oroton in Adelaide, Brisbane, Sydney and Melbourne. In all but the Sydney store, I was the only person in the store. Perhaps it is because I visited the stores during non-peak shopping times? I don’t know. Having said that, I normally buy Oroton items from their online store rather than a bricks and mortar store.
Does anyone else have thoughts about ORL stores? Especially the new stores in Asia?
My experience has been that they are quite usually busy. There is one store in pitt street and another in the new westfield in pitt street which i think might need to be addressed but all the others have been busy especially the one in the QVB and Parramatta. I have also had to line up at their store in the Homebush DFO along with many others, it was like a feeding frenzy for some people in there.
No informed decisions on the Asian stores but i think it will be touch and go but if they gain traction then they will be big. It will be a long term thing, i expect them to be pretty quiet at the intro stage.
From time to time I happen to glance at the Forbes Billionaires list. Alas, every time I look, I have not yet encroached upon it.
I have noticed that out of the top 20 names on the list, nine of them (arguably 10 or more when you consider “diversified interests”) are in retail.
Names like LVMH (Bernie), Zara (Ortega), IKEA (Ingvar), Wal-mart (Waltons C, J, A and R) and H&M (Persson) dominate.
What does this mean for those who aspire to join them on the list, or more realistically, invest with them?
Humans dislike being naked. In public anyway, what I do on Sunday mornings in the privacy of my kitchen is a post on another blog.
Humans also dislike sitting and sleeping on the ground.
As such, there are lots of businesses who make and sell these things and so these are highly competitive industries with relatively small margins (ex. LVMH*)
Thus, the best returns on equity are to be had by businesses who can sell at the lowest price and do business at the lowest cost, by having big factories where costs of production are low (generally the developing world).
Spread these production costs across cavernous outlets and you minimize your per unit and per customer cost of doing business. Do this consistently for a period of time, and you are awarded with share of mind. Witness the Sydney CBD Westfield come April 20, when Zara lands and begins voraciously devouring the ROE’s of Witchery, Saba, Country Road, Cue etc. Gresham private equity have been shopping Witchery and Mimco recently, and will be staining their made to measure Hugo Boss dacks if they can’t get it away this half.
Become part of the retail zeitgeist and people will drive 30 minutes across town to put their kids in your pit of balls, eat your cheap meatballs and attempt to fit their purchases (assembly required) in their station wagons.
Reinvest your earnings into global domination and eventually you make the pages of Forbes.
*LVMH is obviously an exception, they operate in a oligopoly and have massive competitive advantages on the price side of the equation. I’d argue that given their scale relative to their key competitors, they would enjoy a relatively low cost of doing business.
Great and entertaining post Dan. haven’t had a look at the forbes list, but i will take the Donald Trump approach and say where ever i am, i should be higher than what they are saying.
I agree with your Zara comment as well, those brands are in trouble once April 20 comes.
I’d also add that Zara and IKEA’s brands in particular also offer a design proposition in addition to a value proposition. A big part of Zara’s strength in generating return sales is its ability to mass produce the latest fashions at lower cost within a short space of time.
The article at the link beside, albeit dated, asserts that Zara can turn a design into a delivered product, runway to rack, in 15 days. http://hbswk.hbs.edu/archive/4652.html
Key to this competitive advantage, and a lynchpin of all successful retail businesses, is the supply chain. Moving lots of goods goods quickly and efficiently from a big low cost production facility to a big low cost distribution facility / outlet across large supply lines is fundamental to a high ROE retail business.
I think Oroton scores points on these two aspects. SE Asian markets are definitely closer to their production facilities.
With respect to Asian brand awareness, my better half also agreed that her mainland and trendy HK mates might turn their noses. I believe the Oroton market segment does exist in Asia, and that it dwarfs the population of this country.
Building brand awareness within that target market, however, is always going to be tough when you can’t access real estate.
“Sally MacDonald is a brilliant retailer” Is she ? She was a consultant prior to joining Oroton. Oroton was a family business being run as if nothing had changed since the 1960’s, and all it needed was a CEO who could drag it into the 21st century. She has done that, but I fail to detect any “brilliance”.
Further, I predict the push into Asia will bring them crashing back to earth. Asian women are extremely brand conscious, and in Asia, nobody has ever heard of Oroton. Ask yourself why an Asian woman surrounded by all the great brands in the world, would suddenly buy an Oroton product.
Expect some serious writedowns from this venture.
I have been in the Asian export business for a few years so I want to add some food for thought on your question about Oroton moving into this market.
Yes you are correct about Brand being king in Asia, hence the proliferation of counterfeit product. It could also be argued that Asian Women have been the saviour of companies like LVMH who would have been in bankruptcy through the GFC if not for the massive dollars being taken in China.
However you need to ask how it was that the Chinese woman came to desire the luxury brands they now all sport (real and fake). Are they leaders or follower, generally followers, so as you point out why would they adopt a new brand? Well go to the centre of the cities of Australia’s east coast and you will find that young Asian women are already taking home Oroton product. This will help to lead the brand into new markets as these often transient residents taken the brand home with them. In terms of suddenly buying a new brand they need to build the right feeling into the retail experience in Asia to lure in the shopper, but consumption of Luxury goods is so massive in that region they would be silly not to have a serious push towards taking a stake in our neighbouring region. A good start would be airport outlets as rich Asians love to travel and what better introduction to Oroton than the captured space of a terminal when they are already getting into a high spending mode?
Remember that LV and the other European brands are still relatively recent entries to China in terms of their business’ life. We don’t know how many people in Asia are already hitting the Oroton website and asking where they can buy the product locally? Perhaps a sparkling new Oroton website in Chinese is already in production, at least it should be.
You could be correct, they could fail. I will not write Sally her business plan here, she can hire me if required. But I suggest ORL is not doomed to failure in Asian markets Alan. I see enough Chinese girls locally with Oroton products to detect the brand acceptance, the key factor is how they deliver the retail experience in a new market ripe for luxury aspirations. However I do not own ORL at this stage either.
Having said that my global pick for best retail is also Zara, they do an outstanding job, and I will watch the Bourke street store opening become a huge success I am certain of that. They truly have polished their model of vertical integration and speed to market, from what I see they do not saturate the market with product either, so people keep going into store to find what is currently available. When I bought in Zara HK during the GFC, every other retailer was in heavy sale mode, unlike the Zara store where I had to pay full price for a jacket I could not get anywhere else, and would not be replaced after I took it off the rack.
With so many Scott’s posting these days I decided to switch to Mr W
Please try another name. I don’t want new visitors to believe than can hide behind aliases. Perhaps you could go with Scott W?
Roger you might be taking the fun out of it. Besides I don’t need the tax man or my ex wife seeing me here making money…
I think your are safe Scott.
After all how many Scott W’s are their around. Quite a few I would think.
My Ex wife is rather amused to see my name and photo up here. She actually thinks I am quite the celebrity. I find it very embarrassing when she mentions it.
I agree to an extent, but the improvement came in as soon as she started as CEo and to consistently earn ROE as high as they have takes skill.
I am cautious on the Asian experiment, we will see what happens. The challenge will be to make those people hear about oroton. I believe the products will match up quite well and the price will be attractive, yes they are no Chanel but they have their own little niche and they have designed their products very well. I think it might work, but there is an equal chance it will be a disaster. I will wait to start hearing some results from it.
Peter M (Mully)
If my memory serves me correctly, this is not the first time Oroton have entered the Asian market. They did so unsuccessfully some years ago under the leadership of Robert/Ross Lane albeit at a different time and in vastly different consumer environment. The same can be said for their foray into the US around the same time which wasn’t successful either. Hopefully they will achieve better results this time under Sally McDonald’s leadership but I’m not holding my breath.
I was wondering if you could publish a table which provides a defined criteria for your MQR system? Ie. ≥20% ROE, ≤ 10% Debt to equity etc…..etc. = A1
This would help me appreciate your rating system as im sure it will also assist your other valuable students.
Look forward to your respond
That is Roger’s closely guarded secret, Peter, and I wouldn’t give it away either if I was him (let alone for free, on a blog to people he doesn’t know). I think we should all be grateful for what he has given already. Remember that for most of us, the only cost has been 50 bucks or so for his book.
I agree, it’s like the recipe for KFC, Coke or Heinz Baked Beans – a closely guarded secret and not to be given out lightly as I sense it would create problems. A “formula” to identify A1 companies, should not replace the need to carry out your own thorough research to identify investment grade companies at attractive prices. As we have seen after Roger’s appearances on TV and his articles in Eureka, I think this is exactly what would happen should he release this secret onto the streets.
I absolutely appreciate and grateful for what Roger is doing and admire his open and honest approach to sharing his investing strategy. Its very rare that any investor shares their investing/trading systems via blogs or books in the detail which Roger has; and for this i cant thank Roger enough.
As I see it the MQR System isn’t the single secret ingredient or holy grail for the success of value investing but a method of grading the quality of all different companies in different industries.
I think selecting the Required Rate of Return, future ROE & evaluating the companies future prospects for the given and future market climate is the key/secret ingredient or skills required to establishing a fair intrinsic value and determine if the company has a bright future.
But back to the MQR.
We know the A, B, C is associated to the quality of the balance sheet – I dont think this is the secret ingredient as how to evaluate a balance sheet is taught and i think this is also adequately described in the book and on his media appearances.
We know 1-5 is associated with the performance ; stability, predictability etc…etc. Ok this aspect can be subjective and Roger states he has 38 ratios to determine his final MQR and im not asking for each of the ratio’s and the scaled answers required for each rating; but perhaps a simplified criteria otherwise what does the rating system mean or tells us?
We know C3 is the lowest investment grade in Roger’s eye’s but that doesn’t mean anything to me as its not quantifiable. We know A1 is the highest quality stock but calling it an A1 doesn’t really mean anything to us besides Roger thinks its one of the best stocks on the Australian Stock Exchange. I think people that dont understand the market or how to evaluate the businesses are taking Rogers A1 rating and comments via any of the media streams and thinking “well he knows better than i do so if its one of the best on the market in his eyes i should own it”. As Roger correctly pointed out this is totally irresponsible but evidently happening.
All im saying is that I totally believe in Roger’s approach to investing but without providing some basis for which this rating system is benchmarked i don’t see the value in having a rating system (besides internally with his fund staff etc as they understand it) as we dont know really know what its telling us, but a company with an A has a stronger balance sheet than a company Roger gives a B; and a company with a rating of 1 has a better performance likely hood than a company Roger says has a 3 rating.
If i could understand the rating system it would be much appreciated as for now I use the evaluation formula’s and tables to determine my intrinsic value; compare that against my buffet spreadsheet and then research more behind the balance sheets to determine if my formula’s are correct and if its a business i want to be apart of should the price be offered suitably below my intrinsic value. This system is working well for me but i just don’t understand the rating system and curious as to know how to appreciate it, use it and be able to comparatively provide my ratings against stocks when Roger asks for our thoughts.
Perhaps I have missed something and if so I welcome further discussion.
I apologise Roger if this comes across ungrateful as this is definitely not my intention but to understand your MQR system at greater level.
I really appreciate your efforts and the amount of information you expel on a regular basis. Its insightful and inspiring – thank you.
Agree with Greg Mc. We will never know the exact inputs he uses. Instead of worrying about that we should be thinking about things ourselves. it also doesn’t mean that Roger would invest in them so they are here for a reference only.
We may not know the inputs but we know what it measures so there for when Roger says a company is A1 or C5 we know what it means. The inputs anyway are probably things that we measure everytime we look at the company and we have his book which lets us know what he is looking for so we can do it ourselves.
Might not be exactly the same but i am not exactly like Roger and my needs and criteria for an investment could be different, i will use his MQR as a reference but i will wait to see what I think of them.
I have passed on CCV in the past but it does look one of the better ones in retail ATM.
Interesting to see you ORL MOS. Backs my decesion to sell and put the money elsewhere.
Nothing coming through ATM in my view but I would happy to hear others views
I have dithered on ORL. I was less impressed with their recent report than the previous one, and that previous one was not quite as good as the one before. I suppose there could be a trend developing there! I certainly think that the Asian expansion is the key. It is hard to see the local stores producing significant improvements as the roll out and store refurbishment program winds down – I think most of the low hanging fruit has been picked. To expect success with the Asian expansion requires a leap of faith though and it is far from certain that it will be successful….but of course if it is it could be stellar. I still hold my relatively small number of ORL but I am watching closely.
I thought ORL reached saturation about last year (i think i mentioned it in my 12 stocks of xmas post) and i think this is being backed up by the results so far, overseas expansion was one area for growth that i thought of and probably the most lucrative but the highest risk.
I was big on this company but have cooled somewhat and want to see the results from Asia before i take the plunge. Product wise i like it, business wise i did like it but am not sure how i feel about it now.
It was even better back in Oct 2010 at 0.585 per share
I don’t own any retail stocks but if I had to choose, I think that CCV is in the best position to do well in the environment we face.
There are too many structural issues that retailers face:
– raising input costs (price of cotton going through the roof, rising fuel/transportation costs)
– top of credit growth cycle
– online product substitution
– increased savings over spending (debt reduction?)
– financial stress experienced by some (eg those in tourism and general exports)
– rising inflation to focus budgets on lowest costs and consumer staple as opposed to discretionary items
Once all these issues have abated (or there is blood on the streets) it will time for me to focus on this sector.
Hey Greg Mc,
Nothing too wrong with ORL in my view. It was just my least fav and I found something better. I recall flaging that after the 30 june accounts came out.
Just not a good look with a counrty hick owning ORL. These guys out here kept thinking I meant ORG and It was just too hard to explain that the guys digging holes in their farm are a very expensive company.
Yeah, I can understand why you sold. Even the sheilas would reckon you’ve gone soft. Imagine if the blokes saw an oroton silk boxer shorts tag hanging out of your Yakka pants that even accountants wear to work in QLD – you’d be a laughing stock! (don’t tell anyone around here that I own ORL either, ok?)
I’ve mentioned my thoughts on ORL and they’re about the same as Andrew’s (above) but there are a couple of other reasons that I haven’t sold:
a) While upside in Australia is limited IMO, I don’t see them going backwards
b) They are disciplined enough with the overseas expansion not to bet the farm and invest only when justified – so even if it doesn’t work out, I don’t think it’ll cost them severely.
c) I’m not fully invested personally and so the alternative to holding ORL is holding cash instead, and I think the return will be considerably better with ORL. Even if the share price doesn’t move with a rising IV, the grossed up yield is a fair bit more than the cash alternative.
d) I’d rather not give my hard earned capital gain to the tax man yet.
Essentially, I don’t think the downside risk is significant and I don’t have any other immediate use for the cash so it is staying in ORL for now. I’m just not rushing out to buy more right now.
Just wondering what everybody thinks about the alliance of Cash Converters with EZCORP? Is this really in the interest of shareholders? The market does not seem to like this – if you go by price. But I am really interested whether this is going to increase the value of the company.
As a CCV shareholder I have been pondering that question myself. In the short-term, I think it serves to put a ceiling on the price (ie the price won’t rise above 91c until the transaction is completed). Overall, I would have preferred if they could have extracted a greater premium from EZCORP. There is a no solicitation clause in their contract which means they can’t even go seeking a better offer.
In the longer-term, it does open up CCV’s growth options as EZCORP are definitely looking to grow the franchise. They are not limited to Australia as many of the retailers mentioned are and they have already demonstrated they can operate successfully overseas.
Overall, given they still have a reasonable MOS (as suggested by Roger’s article), and good growth prospects I am happy to continue holding. They have already been good to me and I believe there is still some decent upside there.
Wow, thank you for such a concise article.
The detailed stats including MOS for all these stocks is really valuable. I think patience and buying at the the right tine, is probably the the most important lesson you are teaching us all.
All the best
The next king of the australian retail market is spanish. I expect zara to make a big impact on the australian retail scene. I expect their store in the new westfields on pitt street to be the most popular in that precinct. They have a great niche and great reputation. I think they will have a big impact on certain retailers both listed and non listed and will have an impact on both david jones and myer, although I expect myer to be affected more so than dj’s due to dj’s high end product range against myers mid range.
Myer is in desperate need of a makeover. They are stale, their product lines are irrelevent and they can’t keep buying designers to try and get better brands in their store. I think a very smart fashion retailer could turn this around and make it a good company but who wants to put that much effort in and I don’t invest in the chance for a turnover so I will continue to refuse to touch this company even with a ten foot mascara brush.
Dj’s will be an interesting sight. New management still needing to prove their worth but I believe they do have a great prescence in the market and the exclusive rights to stock certain brands is a plus. I have dj’s on my watch list and will continue to monitor it and see if at the moment I am right or roger is right. I am still a fan but there are headwinds so we will see.
Jb’s is of course still a great company albeit great mature company instead of great growth company. However all companys in this marketplace will become more at risk from competitors but I expect jb to at least be able to match them. Can’t say the same for poor old gerry. People know what they are getting with electronics so they don’t need to see them or try it on first, there for the only issue is price and who has the best.
Oroton is of course a great company, well run and hugely profitable, looking forward to seeing some results from asia. If that goes well then I think there is still some stellar tears ahead for them.
I have my own view as to what I think the future is for retailing and I think there will still be a need for real shopfronts but the use of these will be slightly different.
Agreed. Spent 4 weeks in Hong Kong over Xmas period and Brand retailers (incl Zara) cashing in on massive influx of cashed up mainland Chinese being bussed in for whirlwind shopping trips. As Alan alluded to above, Asians (incl. Japanese) very brand focussed and this will be the challenge for market entrants or brand unknowns like Oroton
Zara best retailer in the world hands down.
Ranked the 3rd largest in Spain and the 54th in the world. They have a long way to go to claim the best in the world title.
On what basis?
I think Roger has ROE comparisons in mind, in which case, Oroton is probably the best retailer in Aus.
In terms of value, though, Oroton is hindered by its inability to scale up it’s equity.
Globally Walmart would easily be the most valuable retailer, and from memory has ROE ~22%. As a retailer of scale, WOW flies the flag for Aus with ROE in mid to high 20s, but is constrained by the population of Australia.
These sorts of comparisons are absent of Zara and IKEA, who are private, but would definitely be up there for reasons listed above.