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Why am I scared? Well Matalan, who released a storming set of full-year results this morning, are the latest in a long line of highly-rated fast expanding retailers whose shareholders are currently walking a deadly tightrope. Warren Buffett points out the troubles that lie ahead for the discount retailer:
"Retailing is a tough business. During my investment career, I have watched a large number of retailers enjoy terrific growth and superb returns on equity for a period, and then suddenly nosedive... This shooting star performance is far more common in retailing than it is in manufacturing or service businesses. In part, this is because a retailer must stay smart day after day. Your competitor is always copying and then topping whatever you do. Shoppers are meanwhile beckoned in every conceivable way to try a stream of new merchants. In retailing, to coast is to fail."
The key words here are "your competitor is always copying and then topping whatever you do". Exactly! Retailers, especially those that are involved in clothing, have no sustainable long-term advantage. Retail fashions change from one year to the next. And it's easy for competitors to spot the winning formulas, copy them and then offer their alternatives at a lower price.
The Rise and Fall of JJB Sports
Take a look at the recent history of JJB Sports (LSE: JJB) or Electronics Boutique (LSE: EBQ). Both companies rolled out their stores throughout the UK, riding the then fantastic growth in the demand for sportswear and computer games. Chunky like-for-like sales growth gave investors much comfort as the respective share prices and profit multiples headed towards the stratosphere.
Unfortunately for investors, consumer tastes change rapidly. Wearing branded sportswear suddenly became unfashionable, and with rival merchants JD Sports (LSE: JD.) and Blacks Leisure (LSE: BSLA) having jumped on to the bandwagon too, the sportswear market became an overnight bloodbath.
The same retailing disaster happened with the computer game market. The introduction of new consoles led to heavy discounting of old format games. Coupled with many new entrants in the market, Electronics Boutique suffered badly from every other retailer trying to dispose of unwanted software at any price.
At the end of the day, whatever the retailing growth "concept" is, copycat rivals will eventually turn it into a commodity dogfight. And to make things even worse, fickle consumers then usually turn the once growing retailing trend into a declining, or at best a static, market.
Discounting for Growth
And so here we go with Matalan. The company has capitalised on the recent trend towards discounting. Offering cheap and cheerful merchandise from inexpensive out-of-the-way sites has proved to be a hit with consumers. Throw in a membership scheme allowing Matalan to create a database for direct mailings, and just like sportswear and computer games, you have another classic retail "concept".
As the Matalan stores have been rolled out, so the vital like-for-like sales growth figures have been very impressive. During 1998, the figure was 18.5%, the 1999 results published today state 20.9% like-for-like growth, and incredibly, Matalan have experienced 31.2% like-for-like growth in the ten weeks since February.
Although today's reported results were from a 60-week period, as opposed to a normal 52-week period the year before, Matalan still produced some stunning figures. Group sales rose 56% to £433m, profits before tax leapt 138% to £54.1m and earnings per share jumped 151% to 9.8p
At this point, I could go into all sorts of financial details from their latest results, poring over sales per square foot, sales per store, market share, gross margins and so on. But, all those facts and figures are pointless. Because of the dynamic and ever-changing nature of the High Street, extrapolating a retailer's past performances is a mug's game. Just ask any Electronics Boutique shareholder.
Instead, Matalan investors just need to know two things from today's results. Firstly, at the current share price of 500p, Matalan stand on an eye-popping multiple of 51 times today's earnings. And secondly, four directors are proposing to sell large chunks of their existing Matalan shareholdings. Up to 50m shares (worth £250m!), or 12% of the company's issued capital, are due to be sold.
A very high rating, directors offloading their shares and the inevitable boom-and-bust of retailing concepts all indicate that Matalan shareholders should be heading for the checkout very quickly.
Related Links
• Matalan discussion board
• Motley Fool Industry Focus 2000
• Matalan Website
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