Last week we introduced a hybrid growth/value investing strategy known as GARP (Growth at a Reasonable Price) and used a stock screener to identify some retail sector shares that might qualify as GARP investments.

The share that most piqued our interest was NBL (Noni-B).  A quick check of its current share price reveals a bleak picture, and for those of us unfamiliar with women’s high fashion, we also learn high-end fashion is their business.

Noni-B is trading at 52-week lows.  We know it is a retail stock and the recession hit that sector hard, so we check a 5-year price chart for the shares.


In the first quarter of 2007, NBL was trading at $5 per share and today it has dropped to under $1 per share.  Now let us look at some key financial ratios to see if there is anything there that might explain this drop of around 80% of its share price in four short years.  Here is a table comparing the ratios for NBL against those of the ASX retail sector.

Retail Sector
(Price to Earnings)
 6.14  12.33
(Price to Book)
1.16  2.2
(Price to Sales)
.38  .73
(Price to Earnings Growth)
.25 1.26
(Dividend Yield)
9.7 4.9
(Current Ratio)
1.26  1.56
(Quick Ratio)
 .32 .51


Strictly by the numbers, NBL actually looks somewhat attractive.  Despite whatever is driving down their share price, they are managing to maintain a healthy dividend and their liquidity ratios, while not outstanding, suggest they have sufficient cash for emergencies.  Their Price to Earnings, Book, Sales, and Earnings Growth all suggest shares of NBL are undervalued.  At this point, it appears the decline may be more due to economic conditions than to the company’s internal performance.

However, these numbers are a good example of one of the disadvantages of valuation ratios using share price.  The lower price per share makes these ratios look better and instead of being indicative of an undervalued share, they could also indicate a share in deep trouble.  We have to go beyond the numbers to get the rest of the story.

For many retail investors, this is the “fun” part of investing – the amateur detective work where you go off searching for clues to the meaning behind the numbers.  For our first clue, we are going to look at another set of numbers for one of Noni-Bs Australian competitors – the Specialty Fashion Group (SFH).  Since they are in the same business, the shares of these two companies should show a similar price movement pattern before, during, and after the market crash.  Here is a 5-year price chart comparing the share price movement of these two competitors:


The pattern is the same, although SFH has recovered slightly better.  From the chart, it appears the overall economic climate, and not anything unique to the company explains
NBL’s decline.  However, as always, there is more of a story to be found behind these numbers.  For that, we turn to the company’s own financial statements.

NBL reported half-year profits recently, reporting a 58% drop in profit for the first half of fiscal year 2010.  Newcomers to share market investing might be puzzled when noticing only a 1.7% decline in sales for this period, which you can find on the company’s Statement of Financial Position.  How can such a small decrease lead to such a large drop in profitability?  Welcome to the world of retail, where everyone discounts, and discounts heavily, in the face of economic downturns.  Discounting produces sales at lower margins and decreased profitability.

One of the many advantages of reading financial statements directly from a company’s website instead of on a financial investing site is the Management Discussion section.  

Every company’s financial reporting presentation includes a section where management attempts to explain the results and highlight their strategies going forward.  Intelligent investors know the quality of the management of a company is one of those intangible factors that are not always evident from the numbers.  Quality leadership is often reflected in these management statements.

NBL management attributes their performance to slowing consumer confidence, a wetter than expected summer, and discounting to stay competitive with the rest of their market.  Although they later highlight the recent Australian flooding as a reason for a cautious outlook going forward, they did not use that tragedy to explain their poor performance, as have some other Australian companies.

Their strategy during the decline and going forward includes making investments into the company in the form of store improvements, marketing enhancements, and employee training.  Many financial experts will tell you quality companies with strong cash reserves often see downturns as an opportunity for investing in their future growth.

Some companies overreact to downturns, cost-cutting at the potential expense of their future.  During the downturn, NBL closed only one non-performing store.  

As we said last week, retail shares provide the unique opportunity to visit a store to see if what goes on there matches the pronouncements company management proudly make in their financial reporting.  NBL tells us their employees are getting more training and their stores and being refreshed.

In addition, they tell us they have a strong people focus with a highly motivated team.  NBL may be a public company, but reading beyond the numbers tells you it is family managed, with 40% ownership remaining within the founder’s control.  

Some additional searching yields an interesting interview with one of the founder’s sons, now a managing director.  The Australian edition of the Wall Street Journal was following up on a rumor that NBL was a takeover target.  David Kindl, son of the founder, denied there was any truth to the rumor and went on to say his only interest was growing the business.  “I am happiest when a customer leaves our shop with a smile on her face because she bought a nice frock from Noni-B.”

Investors can verify these claims for themselves by visiting a few stores.  In the case of NBL, you can learn most of what you need to know by simply observing customer employee interactions and talking directly to the employees and engaging them in polite but probing conversation.

It is easy to spot satisfied customers as they exit the store.  It is also easy to spot telltale signs that the company’s pious pronouncements about team spirit and moral are pure hogwash.  No retailer ever says in their reporting, “We don’t care all that much about what our employees do.  It’s a trade-off for their low wages.”

Yet in retail establishments across the country and around the world, you find employees who are more interested in chatting with each other than they appear to be in taking care of you.  You find stores that look like they have not seen fresh paint in decades, despite the statements about company upgrading and remodeling of the stores.

All of this you can see with your own eyes, if you are looking for it.  You can talk to the employees and ask them about their training.  If the store you are in looks fresh and up to date, ask if it was recently refurbished.  In a company with true team spirit, employees will know when their stores are scheduled for upgrading and which stores have already had their “makeovers.”

In a company with true team spirit, employees will act like they enjoy what they are doing, because they do!  If you have not already done so, take the opportunity to visit a retail location of any publicly traded retailer in Australia and observe the store, not through the eyes of a shopper, but through the eyes of an investor.

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