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Lecture 9 a Great Investor Discusses Investing in Retailers and ANN

Lecture 9 a Great Investor Discusses Investing in Retailers and ANN

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Published by: John Aldridge Chew on Oct 14, 2011
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Lecture 9: A Value Investor in Retail Discusses ANN
www.csinvesting.wordpress.comstudying/teaching/investing Page 1
April 6, 2005
Editor: This lecture is an excellent supplement and follow-up to the prior lecture on investing in retailers given in the link below. The speaker has a focused circle of competence and it shows in this lecture.
GI = Great Investor
GI Lecture on Investing in Retail Companiesand a Retail Analysis of Ann Taylor Stores (ANN)You can compare this lecture to the one here:
Today we have a special guest, GI who has run a hedge fund, XXXX Partners, for the last 10years with an extraordinary record. She invests almost exclusively retail stocks and someconsumer stocks. She has had a tremendous record sticking to what she knows. In otherwords,
her circle of com
petence didn’t have to be that large
. She has been able to build a
nice portfolio with huge returns over those ten years. And it shows that you don’t have to know
many different things. Last year her pick that she discussed in class was
Abercrombie (ANF)
 which went from $25 to $58.
Lecture 9: A Value Investor in Retail Discusses ANN
www.csinvesting.wordpress.comstudying/teaching/investing Page 2
GI will discuss her current idea, how to evaluate it, and what her thoughts are now.
I will talk a little bit about how I started and why I went into retail. I really wanted to find aniche for myself. Something I could relate to. I like the consumer sector.
I like to shop.
Ifocused on those companies easy to understand where you could get out there, touch, feel andunderstand.
I could get the customers’ understanding a
nd get their feedback. So it is one of theeasier sectors, in my opinion to understand and analyze. Another thing I really like about retail isthat you are getting a lot of info and it comes out on a monthly basis, for example, like samestore sales (SSS)--Store sales of stores that have been opened for at least twelve months.Unlike other industries where you are getting numbers on a quarterly basis, you are getting aton of information coming out of these companies on a monthly basis, which is good and bad. Itis bad because it creates tremendous volatility in this sector, but that is the reason it is good.Because you get the opportunity to buy things when they are unfairly cheap. You get to buythings when people are often trading them. If you have a value orientation and a longer termorientation
when I say longer-term I mean one to two years because people are mostly
focused on the next months’ numbers. If you can take a step back and see the big picture, there
often a lot of opportunities out there.And a lot of people hate this sector for that reason.
I can’t analyze what the next hot trend is.
don’t know whether 
’s Spring line looks good.
And that doesn’t matter 
and that is the beauty of it.
You really don’t have to understand, ―Whether management getthe right denim skirt doesn’t matter, what you have to get right is if management knows how to
run a business, are they generating good returns on capital? And if they miss so what? I getanother chance next season. And they certainly are not going under in the meantime.So
is a case in point if you look at their stock chart and you can go backa year ago you could have doubled your money between then and now.
I can’t say that a lot has
happened in the business fundamentally that has changed from what kind of business they arerunning or who their customers was. There was a management change but in my opinion it was
GI discusses
 for purchase on Oct 29, 2003. Sold in Mid-$40s.
Lecture 9: A Value Investor in Retail Discusses ANN
www.csinvesting.wordpress.comstudying/teaching/investing Page 3
not significant, but what was happening for a good year and a half prior is that they weregenerating negative same store sales (SSS) and negative comp store sales. People throughoutthe industry could not focus on what type of business they were running.And they were generating EBIT margins close to 20%, amongst the highest in their peer group.And all anybody could focus on was on whether their next comp stores sales was negative. In2002-2003, you could have taken a step back and said, I recognize that comp store sales arenegative, perhaps there are merchandising issues here, but I can see they run a good businessand if they could stabilize that comp, if they could just generate at the bottom of those compnumbers
they were running negative 9, negative 5, negative 9, but once they could stabilize
their comps, people thought, ―Oh wow, look at this business!‖ This is a great business and all o
a sudden people were not just focused on the SSS but on what the actual business was doing.This article (included below) interviewing a money manager who covers retail stocks and hisquote is very similar to how a lot of people think about retail stocks and how most or all of thesell side thinks about retail stocks. Basically he said:I have my people visit stores and malls to see how much the items are marked down and howlong the lines are at the registers. I'll buy a stock if I think the company is going to beat numbersand short it if it is going to miss numbers. It is that simple.
INVESTING: King of the Retail Jungle
Tuesday, March 22, 2005
Hedge fund manager
David Berman 
profits by thinking like a patient predator."I used to be a victim of people like me," says hedge fund manager and onetime accountant
David Berman 
. "Every time I bought a stock, someone smarter than me was selling it. Everytime I sold, someone smarter was buying." So when he formed a firm to manage his own moneyin 1997,
decided to focus on a single sector and master it. His choice? Retail. This sonof a furniture maker spent a year walking malls and eventually developed a custom index
theDeeBee (as in
David Berman 
to compare sales vs. inventories at U.S. retailers. Hisspecialization strategy has paid off: Berman says he has averaged a return of 17% after feesover the past eight years with only three down months. He now manages more than $100million through Durban Capital, a hedge fund he named for his hometown in South Africa andlaunched in 2001. A big part of his formula is that he's willing not to buy if prices aren't right.FORTUNE's Julie Schlosser phoned Berman in Cape Town (where he spends three monthsevery year) to chat about the sector's latest batch of strong sales reports, why they don'tnecessarily bode well for stocks, and what investors can learn from crocodiles.
Despite lackluster holiday sales, the S&P 500 retailing index is up 11% for the past year.Can retailers keep beating expectations in 2005?
 February surprised everybody, retailers included. It surprised me. There are a bunch of theorieswhy. Perhaps tax refunds are better than people thought they'd be. Fashions are pretty good.And I think weather has been a positive factor. It was about four degrees warmer than usualacross the country in February. But to a large degree, during this time of year the retail groupgets moved for macro reasons.
Which macro factors affect retailers?

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