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3 O'Clock High: Touch Me


You lookin' at me? Huh? Huh? You lookin' at me?


I don't care much about the macro retail sales numbers.

It's not that the data is noise-laden, backwards-looking and subject to endless revision, though it is all of those things. The problem with numbers like Mastercard's Spending Pulse estimate that retail sales rose 8.7% for the Christmas shopping season is that it changes nothing, in terms of your portfolio.

Estimates for the increase in retail sales for '05 vs. '04 range from about 5 to 10%. If you hear a number falling meaningfully outside the range, it could skew your book. Otherwise, it's just noise. It doesn't suggest anything about what you should do with your WalMart (WMT) position. 8.7% doesn't make me rush to cover the rest of my Best Buy (BBY) short.

It's a number which changes nothing.


Tonight's "On the Money" is almost certain to include at least a few seconds of me making the point that top-line data is only part of the picture. Like "crowds", "busy" and parking lot spaces available, it's simply another piece of the puzzle. In the big-picture, it's all about margins.

Margin is the difference between what you pay for something and what it cost the store to sell it to you. Retail is a high-tension game of controlling margins. There is scarce room in a retailer's operating budget for reducing the mark-up on their goods sold.

WalMart runs a tight ship. While not what they once were, they are a good retailer. Walmart's operating margin runs at roughly 5% these days.

The Goal of a retailer isn't to be busy. The Goal isn't maximizing the top-line at all cost. The Goal is to get margin. Any retailer can boost sales by selling goods at a lower price, provided they can stock the stores. The hard part is actually making money while driving sales.

This seems like such an obvious point yet I keep having to defend and explain it on TV. It's starting to get me a little worked up... To the point that I'm about 50/50 to go into full-tantrum mode, should I be asked to explain it again this evening.

And, hey, isn't a 50% chance of seeing me totally melt down worth tuning in tonight at 7pm, on the East Coast?

Sure it is.

Something's Happening Here

Competing on price is a Mug's Game. It's a game of one-transaction stands with a series of nameless customers. They love you as long as you have the lowest price. Period.

The stocks I'm interested in are of companies who are loved by their customers. Consumers will surrender margin for companies they love and barely ask about price, let alone comparison shop a place to death.

You can get customers to line up outside your gates and charge into your store like a Who Concert if you give away the margin. I'm more interested in places where people will happily wait in line just for the product and the experience.

I saw exactly three chains inspiring Love over the Holidays. I don't have positions in any of the stocks but I'm doing more work. I think there's a trend bubbling under the surface. I think we've gone too far towards maximizing the cold, efficient, margin-less retail transaction.

Customers are waiting in line to be coddled and they are doing it in odd places. I submit the below as examples and welcome your own.

Build-A-Bear (BBW)

I normally can't run away from cult-children stocks fast enough. I don't own this stock, either, but I did spend an hour building an insanely high-priced Cookie Monster a few weeks ago. And I left the store happy.

Apple (AAPL)

It occurred to me last week that these stores have a raging through-put problem. They literally can't process customers fast enough. But when they do get to you they have a knowledgeable person and slews of sexy-add-on products.

So the "curious" design doesn't matter. The store is beloved.

American Girl

A division of Mattel (MAT). Build-a-Bear for kids too old for Cookie Monster. Again, they have people waiting in line to Personalize a doll at a huge mark-up. And the customers leave happy.

These stores were almost certainly the best thing Mattel had going this year. They are the best thing Mattel has had going in *ages*.

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