My next article in this series looks to add the clothing retailer industry to my research. Any new readers that wish to see a detailed explanation on how I arrive at these results, please see my introductory article that elaborates on my process. As a quick summary, I believe that over the long run, stocks that rank higher than their competitors financially (according to my assortment of ratios) will outperform stocks that have a lower ranking in that same industry. Ratios have their shortcomings, but if utilized properly, they can be helpful in analyzing a company's current financial position.
Included in this analysis is Macy's (M), Dillard's (DDS), Kohl's (KSS), Nordstrom (JWN), and JC Penney (JCP). Pricing data is gathered from Nasdaq, while scores were calculated using financial statements from E-Trade.
|Company Name||Total Debt/ Total Equity||Quick Ratio||Current Ratio||Defense Interval||Current Liquidity Ratio||EBIT/ Interest Expense|
Current Debt Score
1. Kohl's- 1.83
2. Nordstrom- 2.67
3. Macy's- 3
4. Dillard's- 3.17
5. JC Penney- 4.33
|EBIT Margin||Gross Margin||Net Margin||Return on Assets||Net Income per Employee||Effective Tax Rate|
Current Profitability Scores
1. Macy's 1.83
2. Kohl's- 2.5
2. Nordstrom- 2.5
4. Dillard's- 3.67
5. JC Penney- 4.33
|Sales per Employee||Return on Equity||Capital Expenditure Ratio||Employee Cost Per Unit of Revenue||Total Asset Turnover||Return on Invested Capital|
Current Efficiency Scores
1. Nordstrom- 2.17
2. Dillard's- 2.5
3. Kohl's- 2.83
4. Macy's- 3.33
5. JC Penney- 4.17
|Free Cash Flow Growth||Revenue Growth||Total Debt Growth||EPS Growth||Change in Working Capital Growth|
Current Growth Scores
1. Kohl's- 2.4
1. Macy's- 2.4
3. JC Penney- 3.2
3. Dillard's- 3.2
5. Nordstrom- 3.8
After implementing performance-based weighting to each category, I have determined that the efficiency ratios are most correlated to price performance, followed by growth, debt, and profitability. Therefore, instead of the equation for finding the cumulative score of a stock looking like this:
(Debt Score x .25) + (Profitability Score x .25) + (Efficiency Score x .25) + (Growth Score x .25) = Final Score
... it now looks like this:
(Debt Score x .25) + (Profitability Score x .22) + (Efficiency Score x .28) + (Growth Score x .25) = Final Score
With this weighting, more value is given to categories with the greatest correlation to price performance, which, in turn, should lead to more accurate final scores. To answer any lingering questions about how I determine weighting, please see my article that introduces the concept. Here are the most recent weight-adjusted scores for the clothing retail industry:
1. Kohl's- 2.40
2. Macy's- 2.69
3. Nordstrom- 2.77
4. Dillard's- 3.10
5. JC Penney- 4.00
Adjusting For Share Buybacks
In my most recent article, I introduced how share repurchases can influence share price, and thus, why my future analyses will attempt to account for companies' strategies in this area. For more details on how I determine these upcoming weights, please see the article that explains its implementation. In short, I standardize each company's rate of common shares outstanding reduction to have an effect of between -.1 and .1, with the stock that retires the greatest percentage of its shares to receive the .1 improvement in its score and so on. Here is a table showing the data:
|Share Repurchase Rate||Effect on Score|
1. Kohl's- 2.39
2. Macy's- 2.77
3. Nordstrom- 2.78
4. Dillard's- 3.00
5. JC Penney- 4.10
Kohl's did not have one category where they surpassed the 3 mark, which was plenty to secure the top spot in this analysis. In fact, their final score of 2.39 is in the top 20% of all scores I've calculated thus far, largely thanks to its stellar debt and growth metrics. It will be important to see if they are able to maintain this quality of score in the future along with how the score has transformed over the last 5 years- each of which that will be addressed in future analyses.
Coming in at almost the exact same scores are Macy's and Nordstrom, with a 2.77 and 2.78, respectively. Macy's strengths lay in its profitability and growth numbers whereas some improvements rest in debt and efficiency. If not for its comparably slower buyback rate, Macy's could have established a more distinguishable lead on Nordstrom instead of both being identical. Nordstrom performed surprisingly well in the first three categories, placing above average in debt, profitability, and growth groups. However, a lot of that out performance lost its effect when taking into account their slower growth story-ultimately being the cause of not being able to make a run for the top spot.
Right at the 3 mark was Dillard's, whose volatile scores across the board finally settled right in the middle. Efficiency proved to be this company's strong-suit, along with an incredibly strong year for buybacks which gave the score a boost at the end of the analysis. In last place by a wide margin, and perhaps to no surprise to those who keep up with the company, was JC Penney. Disappointing numbers filled the scoreboard for the stock, especially in regards to debt, profitability, and efficiency. Their year over year change in stock outstanding was also the worst among the group, adding insult to injury when implemented into the complete score of the company.
Ratios certainly aren't the be all and end all, but I'm a firm believer this type of strategy can serve as a useful supplement for investors conducting a holistic analysis. Since this is the first year I ranked clothing retailers, the scores are just a snapshot in time of their respective financial strengths and weaknesses. Where the real value will be drawn is when multiple years of scores can be analyzed for trends or patterns.
Feel free to leave any feedback or suggestions in the comment section, and if you wish to see future articles ranking different industries as well as statistical breakdowns of historical scores and their relation to price, click the orange follow button at the top of the page.
Also readers are welcome to suggest industries for me to add into my research. Any suggestions will be put into a written article within the next couple weeks!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.