3 Retailers for a Long-Term Portfolio
Companies that focus on delivering great value to consumers will always win in the long run. It is true in any industry, but is especially true in the retail business. These companies can make great products for consumers with a good price, and/or have great customer service (including a good return policy). In this article I will discuss three retail businesses that always put their consumers' satisfaction first: Nordstrom , Costco , and Amazon.com .
Nordstrom's great return policy
Nordstrom is a fashion specialty retailer, selling apparel and shoes at good prices. The two biggest revenue contributors for Nordstrom are women's apparel (31% of the total sales) and shoes (23% of the total sales). Nordstrom offers consumers peace of mind when shopping at its stores because of its return policy. Colin Johnson, the company's spokesman, said "The return policy is that there is no return policy." The company is committed to standing behind its merchandise and working with customers. There is no time limit or receipt required to return merchandise. If Nordstrom products were bought online and returned, the store takes care of the shipping costs as well. There was also a story about a man who came into a Nordstrom store to return two snow tires. The man was able to get the money back, but the catch here was that Nordstrom did not sell tires.
I don't think Nordstrom is expensively valued, at only 8 times its EV/EBITDA (enterprise value/earnings before interest, taxes, depreciation and amortization). Moreover, investors could get a decent 1.90% dividend yield at its current trading price.
Costco's low cost and sticky business model
Costco has been extremely successful with its low-cost business model. It has built a very loyal customer base by offering quality merchandise at prices close to cost. Like Nordstrom, Costco also has a great return policy, accepting returns for most purchases (except electronic items). Regarding consumer electronics, shoppers can return the product within 90 days. Moreover, it also gives consumers full refunds on its membership fee. If consumers shop at Costco online, the company also pays for shipping costs or the products can be returned to one of its locations.
Charlie Munger, one of the best investors in the world, considered Costco "one of the most admirable capitalistic institutions in the world." He also praised the fact that Costco has quite a loyal shopper base. "If you get hooked on going Costco with your family, you'll go for the rest of your life." Costco deserves a higher valuation than Nordstrom, being valued at 13.35 times its EV/EBITDA. At the current trading price, Costco offers investors 1% dividend yield.
A game changer for retail industry
According to a National Retail Federation/American Express survey in the beginning of 2012, Amazon ranked number one in customer service. Its founder, chairman, and CEO Jeff Bezos keeps thinking about ways to deliver more value to the company's consumers. Consumers, not profits, are his first priority. This is why Amazon sells its Kindle Fire tablet at close to cost. It does not want to make money on selling tablets, but instead on selling books via its Kindle devices.
Because Jeff Bezos cares about consumers, Amazon has kept reinvesting in new technology and distribution channels to bring better products and services to consumers. Its earnings have not been matched with its stock price, pushing the valuation ratio extremely high. In the past twelve months, it earned only $132 million, while its total market cap reached nearly $169.50 billion. Meanwhile, its trailing EV/EBITDA is as high as 51.8. Despite the extremely high valuation, though, Amazon could be a good long-term holding for investors because it has been and will continue to be a game changer for the global retail landscape.
My Foolish take
Investors should go where consumers feel happiest. Thus, all three of these retail businesses could fit well in investors' long-term portfolios. In the short run, their stock prices could experience a temporary downturn. In the long run, though, if consumers feel happy then their business fundamentals will keep improving and their share prices will keep rising.
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The article 3 Retailers for a Long-Term Portfolio originally appeared on Fool.com.Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Costco Wholesale. The Motley Fool owns shares of Amazon.com and Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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