Authored by: Ramiz Chelat, CFA , Executive Director, Portfolio Manager, Vontobel Asset Management
Traditional brick and mortar stores have received terrible press over the past few years. Companies such as Kmart and J.C. Penney in the U.S. and Debenhams in the U.K. have been eclipsed by e-commerce and a changing retail landscape, despite a strong economy. Many others, such as Toys “R” Us and Brookstone, have ﬁled for Chapter 11 bankruptcy.
However, for businesses with the right offerings, expansion through traditional stores can deliver faster growth, high returns, and strong free cash generation. Space growth can also provide predictability. By owning and operating the end retail space, and by generating incremental growth from e-commerce, owners of strong branded products can beneﬁt from much better control over pricing, inventory, display of that inventory, and service quality.
We are selective in our approach and look for companies to pass several tests before deciding to buy a stock. These include clear and distinct competitive advantages, attractive industry structures, headroom for space growth, good control over brands and distribution, and the ability to adapt well to e-commerce. We discuss these points in further detail in this paper.