Tuesday, January 04, 2005


I like to buy market leaders. Although the market leader is not always a huge company, it often is. The market leader often has a "Morningstar Moat" around it; economies of scale, barriers to entry or systems in place that allow it to maintain profit margins in a competitive environment.

In the second half of an economic recovery, it is wise to own defensive issues--companies that sell groceries, tooth paste, under-wear, soft drinks or other items that are not cyclical in nature. On the other hand, one should tend to avoid companies that sell large items like cars and other goods that require financing; items where a significant part of the cost is the cost of money. Refinancing of homes has dropped sharply; folks are not receiving the big lump sums that many have received more than once in the past few years. Folks will continue to buy toothpaste out of ordinary income but they may hesitate to buy a car if their credit card payment is up on higher interest rates.

Of the four companies listed above, my family owns AMZN and WMT. Target (TGT) and Best Buy (BBY) are strong companies and my family shops at all four. Best Buy in particular leads its sector of the retail market. AMZN is the high flyer of the group selling at about 35 times 2005 earnings (55 times trailing earnings). AMZN is also growing the fastest.

WMT and Target fit the defensive criteria the best but folks will continue to buy books, cds and clothes through AMZN in good times and bad. Smith Barney down-graded AMZN this morning because of its high price to earnings ratio. AMZN is a long-term hold for me and I expect steady growth to eventually reduce the PE ratio.

All of these companies have a good customer-bad customer problem. The 80/20 rule works in retail and smart retailers are happy to send their worst customers to other stores. The bad customers are typically the ones who buy a product and then bring it back for a refund. It is hard for any customer to understand a restocking fee but the truth is that stores actually lose money on returns even if they collect a restocking fee. Of the time spent on a particular item, it takes at least 80% of the total time to restock and resell with only 20% allocated to the original process.

I just had a bad experience with Target. A friend gave me a DVD for Christmas. The movie, Bruce Almighty, is a good one that I already own. I took the new DVD unopened back to Target where the friend had paid $13.64. Target had a whole display of $13.64 movies, including this one. The clerk offered me a $9.99 credit for my copy because the computer showed it had been on sale for $9.99 in the past 90 days. Of course, had I had a receipt, the policy would have been to give me full credit for the purchase amount.

I made a few points to the Target clerk and then to the manager. My friend told me he paid $13.64 and the clerk took my name to verify that I do not abuse the return policy. The movies are sitting in the rack at that price right now. More importantly, I was not asking for money back. I simply wanted to trade for another movie from the same rack. As a cheap-skate and as a matter of principle, it was difficult for me to give up a brand new movie valued at $13.64 and pay and extra $3.65 for a movie of the same value. The insult to injury was that the policy pointed out that my friend had over-paid in the first place.

Last night, in a few moments of searching the net, I found thousands of complaints against every retailer I tried. The most common complaint was in regard to return policies. Best Buy has received credit by analyst for wise policies that discourage "bad customers" from returning. However the net is filled with complaints and the company receives a low consumer rating. Target gets more ratings of praise but it too is lambasted for its return policy. These guys need to be careful!

I am not a "bad customer" but one of many new customers to have received the wrong gift. As the owner of ocean front resort properties, I buy tens of thousands of dollars of furnishings annually and maintain a large movie collection. The word will get around.

For now, I will not be investing in Target or Best Buy, primarily because I am more likely to invest in real defensive stocks such as Colgate, Pepsi, Proctor and Gamble, Wal-Mart and, maybe even a Winn-Dixie.

On the other hand, I don't plan to buy my movies from Target. For fun and education, I will take my Bruce back to Target again to see if I can get better luck. These guys are going to spend $3.65 in employee time whether they take my movie back or not. My ultimate goal is to help them improve their policy. They really do not want their policy to result in customers feeling as if they are bad shoppers or liars.


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