 Good day, fellow investors. Today we'll discuss retail stocks. Now you see them, you see price drops of 50, 60, 70 percent and a value investor's mind starts thinking bargain, bargain, bargain. Then you see valuations of five, six, seven crazy low valuations in this market and then you start thinking is that a bargain should we buy in? Well that's what we'll discuss today. Is retail a value or a value trap? I'll start with a personal example of how I see retail, then we'll dig into some stocks and then we'll see what's going on in the whole sector. So let me immediately start with this example which perfectly explains what is going on in retail from my opinion. This is a picture of a small shop in a city nearby where I live which has less than 10,000 inhabitants and a year and a half ago a store opened selling fancy soaps. It's called Savon and I immediately calculated what is this retail store selling fancy soaps doing in such a small city. 10,000 inhabitants, they sell soaps, any kind, perfumes whatever but mostly focused on soaps which cost about four bucks, four euros per soap. With 50% gross profit margin, add costs to two employees, transport, insurance, they would need to sell about 300 soaps per day just to break even because the price of that small shop that they rented out is 48,000 euros per year, thus 4,000 per month. So the point of my story is that retailers like to project past growth into the future. However you're not going to buy 10 more soaps than you usually buy just because there is more supply, you're always going to buy the same quantity perhaps a bit more in relation to economic growth but that's it. However retailers always try to expand, we're going to double our store number by five years, increase, grow, grow, grow, grow. So on one hand supply wants to grow as much as possible but it's constrained by demand and sooner or later the growth becomes limited and reverts into negative territory. Plus the retail sector has one very important headwind which is online commerce that's destroying brick and mortar retail because even I am buying more and more online. It saves me time, I don't have to look around and shops and I find the cheapest price online. So it's a very very interesting thing. By the way on the online retail don't think it's paradise there to invest because the margins are even lower. Just think of yourself or your kids, how are you buying online? You know what you want, you find the cheapest seller and you buy there. This means that the cheapest seller has the lowest margin. It's a very very tough environment and as a value investor I want to see if there is enough blood on the streets of there will be more because we want to buy if we buy when there is an absolute margin of safety and there cannot be more negative news but every other investor has already capitulated. Let's see the example of bet button beyond the company good retailer, good brand, strong brand in the US what's going on with the financials and with the stock price. Something very interesting this is the five-year chart of bet, bet and beyond. The current market cap is 3 billion however the company spent more than 6 billion on share repurchases in the last five years. This is another example of how the management destroyed value doing buybacks because they spent 6 billion now they have a company worth 3 billion which means they spent twice the money of the current market capitalization and that money simply disappeared because the stock price fell from 80 to the current 20. Going into the financials you can see that revenue grew slowly in the last five years from 11 billion to 12 billion and even decreased in the last quarters, gross margins continued to decrease from 41.4% in 2012 till the current 37%. Net income consequently also decreased from above a billion in 2012 to the current 565 million thus 50%. Book value thanks to the huge buybacks even if the profits were very large per share didn't move much didn't change. Nevertheless the company still has a very healthy cash flow per share of 571 million. Now this company is very attractive the stock price was 80 now is 20 the price earning ratio is just 7 there is strong cash flows strong free cash flows easy to buy. Let me show you what happens to such a company in a retail sector which has very very tight margins if the trend of the past continues into the future. The current net profit margin of bad bad and beyond is 4.6% which means that another two drops in comparable sales like it was the case in the last quarter of 2.4% would completely raise earnings and cash flows so if the trend continues that has been going on for the last five years bad bad and beyond thanks to the tight margins in retail would soon become a stock that has no earnings and if they just continue losing revenue lowering their margins gross profit and then consequently the net profit margin then in a few years you have a company that has a low price earnings ratio now but in two three years has a negative price earnings ratio and that's when there will be blood in the streets and then you have to go on to book value going back to the chart book value is $19 per share the share price now I think is $22 per share this means that okay you say there could be some value however that book value consists of inventories which would be impaired if the company cannot sell or sell the discount which would then again lower gross profit margins and net profit margins so don't take at face value that book value in addition after spending 6 billion in buybacks the company has also 1.5 billion in depth which certainly doesn't help this situation now I know that valuations are tempting but it could take a long time before we know who will be the winner among the many cheap retail stock here is a table with a few retail stocks that have low price earnings ratio I show how much are they losing of their net profit margins per year and how many years it would take them at current trends to go to zero a good example is finish line which was a very low 15 pe ratio stock in 2015 and now is a company with a loss so it very quickly lost the value it had in the past another interesting company Francesca's holding again net profit decline in four years that company has a zero profit margin footlocker if the drop continues we are in one year at zero selly beauty good pe ratio small decline in profit margins however they have no book value which is again a negative however we however there has to be more research done in selly's beauty interesting stock so there will definitely be winners in the retail sector and somebody will pick them and make huge amounts of money however be careful when you listen to these stories about past winners about survivorship bias nobody goes around bragging how they bought the finish line and they lost 50 percent or how they bought bet button beyond and they lost 80 percent however if somebody picks the bottom then they will brag about it and then you'll hear oh I had to buy I had to buy I had to buy however it's very difficult to know which one will explode there will definitely be companies to explode this is just the start of my research into the sector I think there is a lot more time for really to be bloody in the streets and I would like to hear also your thoughts companies what's going on we really need data from the field are people more in those stores are you buying more are you buying less are is something changing analysts everybody has the data about everything however if we get and we think if we can share here on our channel data from the field what's going on what's your feeling about this and that company are you buying more is your wife buying more is your husband buying more then we can get some data that's a bit better than what analysts have I don't remember the name but there is a hedge fund that walks around stores all day long in order to make investing decisions in retail and I think that's the best way to invest in retail you have to really see with your eyes what's going on to pick the winners forget about the numbers shown in the financial statements thank you for watching and I'll see you in the next video