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 The Next 100-Baggers in Retail

03/22/2004

One of the only insights that Peter Lynch had was that retail companies can sometimes go to 100-fold and 500-fold increases. All they have to do is apply their method to open more stores around the world. Sort of a replicator similar to Dawkins's concept as essential for a meme to spread. Companies like Whole Foods, and many retailers favored by my friend Larry Leeds like Chico's and many others seem to fit the bill. Apparently Krispy Kreme was there. And Starbucks. And I like what I see of Cold Stone Ice Cream, although the company is not yet public.

I wonder whether a quantitative approach to this might be useful with public retail companies and other replicating companies classified by number of stores, how many years, and measures of growth and return on assets. presumably there is a takeoff point for such retailers and it comes when the number of stores the previous year was x? Certainly Wal-Mart and McDonald's and all the others went through this stage.

We also asked our far-flung correspondents what retailers in their areas have the potential to become 100-baggers. Here is a sample of replies:

-- Vic

• I would offer "same-store sales growth at seasoned stores" as a key indicator. Everything else can be fudged a bit; but if seasoned stores are growing sales per store strongly, you have growth from the base and the new stores, which continue to compound. In a sense, seasoned stores predict what new stores are likely to grow at. -- L.J.
  
   

• Retailers are a mixed mission. Wal-Mart, using global pricing and sourcing not available to other chains, undercuts the LOCAL retailers and drives them out of business...
  
  At some point, like McDonald's, it saturates its products and markets and runs out of competitive pricing power.
  
  America owns all it needs and only needs replacements thus it isn't what same store sales are now BUT the probability of what they will be in the future.
  
  The best practice business model thus is to outsource all to the lowest cost
  producers...in this case, Asia which doesn't have the taxing powers of social
  security, unemployment compensation, and environmental levys...
  
  Why this is significantly important is that next year, by this time, all clothing QUOTAS from China will be lifted...meaning that small clothing stores that have thus far survived Wal-Mart, including specialty stores, will have access to ALL the pricing powers that Wal-Mart has used to try to replace them...
  
  With Wal-Mart no LONGER ABLE TO OFFER THE LOWEST PRICE ON CLOTHES, I really
  wonder how it can grow same store sales at the same pace...where will the differential come from ?
  
  Using the above model, the capable investor needs to look far beyond our shores...and find out the political legal and opportunistic place where past same store growth is possible...
  
  Wal-Mart has used price sourcing to grow, what happens when they can't use such a
  strategy? -- E.
   

• PF Changs' Chinese Bistro still has much room imho. -- T.R.

• There've been articles on chain store-fronts that act as specialized eBay auction
  drop-off sites. Folks too busy to deal with the entire selling process on eBay drop off stuff, and the store workers handle the entire selling/auction process, pocketing ~40% of the proceeds, as I recall. As someone with "stuff" I'd like to unload, but ZERO time, this strikes me as a brilliant idea. -- G.Z.