It may not surprise you to know that I’m not exactly a fashion plate.
I’m from the utilitarian school — if it’s comfortable and functional, I’m in.
And by ‘in’, I mean I’ll wear the same brand/style for years, just replacing worn out items with new versions of the same thing.
I’m a Levi’s guy. I can’t remember the last time I wore anything else.
And unless I’m exercising, I prefer a pair of comfortable boots. I wore Baxters for a couple of decades, and for a few years now a pair of R.M. Williams… but that’s it.
(That even applies to my regular Weekend Sunrise TV spots, too, though I feel obliged to add a business shirt and jacket for that. No tie, though. They’re strictly for weddings, funerals and ANZAC Day these days)
All of which to say, I’m not exactly an ‘insider’ when it comes to the vagaries of the retail market.
Thankfully, I don’t need to be. Indeed, I think being at arms-length is more useful than not when it comes to delineating between fashion and fad.
So, based on my preference for comfortable denim, my time in the retail/food industry, and my careful watching as an investment adviser, I think I’m probably a little qualified to give an opinion on the lastest in what feels like a lengthening line of retail collapses recently — that of Jeanswest.
It’s particularly important for a few reasons.
In reverse order, it competes with a recommendation of mine at Motley Fool Share Advisor, Premier Investments (which owns Just Jeans), it has something to say about the state of the retail sector, and it’s a useful case study for investors.
The first one is somewhat self-explanatory — we’re happy to see our companies succeed, and while we don’t like to see others go out of business, it reinforces the successful — if cyclically volatile — job that Just Jeans is doing by keeping its nose ahead of the pack. Retail is very simple, but cut-throat. If you don’t outcompete the other guy, he’ll put you out of business. I’m pleased to say that, as of today, our Premier recommendation is up 290%, versus 98% for the market, since our recommendation (both including dividends).
The second is a little more complex. Just how is retail going? We can’t really know, at least not in real time. The most recent retail sales numbers, November’s data released a week or so ago, showed growth of 0.9%, compared to economists’ average expectation of 0.4%. That’s an unquestionably strong number. What we don’t know is to what extent the fast growing ‘Black Friday’ sales are pulling spending forward from December. We won’t get that data until next month. It also seems likely that such spending is spotty. Averages hide a lot of information — an average of 0.9% could mean one retailer growing at 0.8% and one at 1.0%… or it could mean one growing by 4% while the other is going backwards by 3.1%.
That’s true of individual retailers, but also whole sectors. Department stores continue to struggle (in vain, if you ask me), while others, particularly online, post strong gains.
Which brings us to our third — and most important for our purposes — area of interest: the ramifications for investors.
I’m asked regularly about my thoughts on the ‘latest’ or ‘latest in a long line’ of retail collapses.
“What does it say about the economy?”
And I try my best not to disappoint the questioner, who is expecting that joining the dots of all of these collapses will lead to a great soundbite.
That’s unfair to the great media people I work with, of course. Many are hoping that the news is good.
But they — like we — are conditioned to join those dots then extrapolate.
Whatever their personal hopes, their expectations are much worse.
It’s what humans do. What we see, and what we internalise. And what the media (rightly) reports on.
But that’s not even close to the full story.
It was a theme taken up by economist Stephen Koukoulas on Twitter over the weekend. He tweeted:
“When we see stories on retail failures, there’s rarely, if ever, commentary on new retail start ups; nor extra jobs in the retailers that are growing. Business churn is actually a good thing in an economy. I can still buy jeans, coffee, toys despite many in those areas going bust”
Which is, for many people, counterintuitive.
Because collapses are larger and, due to our familiarity with them, more visceral, we tend to give them greater weight.
But let me ask you: Do you remember the headline “Jeanswest founded today”?
I mean, even despite its eventual collapse, Jeanswest was responsible for a lot of first-jobs, a lot of retail management careers, and, yes, a lot of denim being sold over the years.
Yet there was no headline that day.
Or take Just Jeans, which has out-survived its competitor.
No headlines announcing its founding, either.
Or, as I tweeted in reply to Stephen:
Large, sudden failure gets the headlines.
Steady, regular progress doesn’t get noticed.
Did you see the headlines:
“Google was founded yesterday”
“New phone will make Apple $1.4T company”
“Internet switched on today”
“Crime rate keeps falling”
You won’t see those. At least not daily. Yet we get reports of retail failures, internet scams and, yes, regular reports of murders, assaults and theft.
Which is legitimate news… but misses the broader themes, trends and context.
Someone started a business the very day that Jeanswest went into administration. Likely more than one person.
Perhaps those businesses fail. Maybe they muddle along.
But whether it’s one of those, or one founded a few months before, or after, a company will be born in 2019 or 2020 that goes on to large-scale success at some point in the next 5, 10 or 20 years.
There was a time when Twiggy Forrest’s Fortescue was reported to be at death’s door.
There was once a bloke, in a lab somewhere, working on what would become the cochlear implant.
And while Myer is currently struggling, there was a time when it was the kind of disruptor that is now nipping at its very own heels.
It is terrible for those losing their jobs. It might be distasteful for some who wish we could all just get along. But capitalism is, as Schumpeter said, ‘creative destruction’ at work.
If we’re not shopping at Jeanswest in sufficient numbers any more, it’s because we have found something better to spend our money on.
It has ever been thus.
Moreover, it’s that very force that’s responsible for new industries, new products and consistent increases in the standard of living.
You think cars would be as technologically advanced if their manufacturers didn’t have to fight, hard, for our business?
As much as I loved my Nokia 121, I’m thankful to BlackBerry for showing us that a phone could be more than a voice-call manager, and to Apple for putting the electronic world in our pockets.
I’m thankful that Apple’s competitors (and its own drive to improve) mean that advances in technology will continue.
The headlines that swirled around the end of BlackBerry and Nokia as dominant handset makers were devastating, and for none more than the companies’ workers and shareholders.
But, far from an economic problem, it shows us that capitalism — despite its many flaws — is still working.
(And yes, sometimes those declines are due to large scale economic issues. Sometimes, we have downturns and recessions. But you know what? We come back out of those, too. And remember, improvements happen despite, not in the absence of, those shocks to the economic system.)
Speaking of downturns, a year or so back I went looking for some examples of how different businesses did during our (mild) slowdown in 2008-9.
I was trying to work out whether history could teach us anything about ‘next time’, whenever that happens.
I started by looking at the sorts of companies that should do badly when consumer spending stutters. I thought car companies and discretionary consumer lending would be useful starting points.
Turns out the data surprised me: I grabbed Automotive Holdings (owners of car yards) and Flexigroup (providers of various consumer debt products like ‘no interest ever’ loans used in furniture and consumer electronics stores).
Except there was no downturn.
Not even a slowdown.
Now, part of that is because we didn’t have anything like the declines in economic activity that they suffered in the US and Europe.
But the bigger reason?
These companies were delivering structural growth that swamped the broader economic conditions.
Flexigroup was signing up new customers, faster than consumer spending was slowing down.
Automotive Holdings was buying up and opening up yards at a quicker pace than people were avoiding buying new cars.
Even Apple continued to grow — because its products were in such high demand, people around the world put off buying other things, rather than forgo the newest iToy.
There are two takeaways for investors:
First, you have to — absolutely have to — look through the big, real-time headlines, and to the broader economic stories.
Second, one of the best defences against cyclicality can be to find small, growing companies, whose structural opportunities will, on average, swamp the economic conditions.
Mark my words: there’ll be some companies, even some retailers, that grow strongly during the next recession.
When you’re big — like one of the big banks, say — you have absolutely nowhere to hide when your industry takes a hit. If banking activity slows down, you’re going to get tagged, as the Americans say.
If you’re a department store, already struggling to grow as fast as the market, watch out.
But if you’re a new, exciting concept, and you’re attracting customers hand over fist? Well, the economic situation will put, as the pollies say, ‘downward pressure’ on your growth rate.
But if you’re taking share, there’s a very good chance you’ll just keep on growing as the others suffer.
They’re the ones that present long-term opportunity for risk-tolerant investors.
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