2 retail stocks to buy and 2 to avoid

Credit: Yoshi Mohri

Retail stocks are inherently fickle, so as an investor you must be extra careful.

Indeed, traditional bricks-and-mortar retailers generally have very slim profit margins and rely on doing a lot of business to generate a decent profit.

And if one Christmas period is a miss, if a website shuts down for a week or a new season’s fashion isn’t a hit with consumers, shareholders can wave goodbye to next year’s profits.

That’s why investors need to go lengths to find management teams with significant retail experience and the companies with solid track records. You can do this simply by tracking profits over, say, three to five years and doing a bit of research on the management teams, and their remuneration structure.

2 retail shares to avoid

Earlier today, shares of Dick Smith Holdings Ltd (ASX: DSH) entered a trading halt and reminded the market why retailers can be serious wealth destroyers.

Shares of Dick Smith have been on a disastrous run since private equity firm Anchorage Capital sold the company to ASX investors in September 2014. The company’s terrible ASX track record not only reminds us to never buy a retailer previously owned by a private equity firm (more on that below), but also that damaged retail brands may never be mended.

Take another classic private equity example, Myer Holdings Ltd (ASX: MYR). Myer was bought by Newbridge Capital for $1.4 billion in 2006, then it was sold to the ASX in 2009 for $4.10 per share, or around $2.34 billion altogether. Did it really become 67% more valuable in those three years? Today, Myer shares change hands at $1.20.

2 retail shares to buy

In contrast, shares of Premier Investments Limited (ASX: PMV), the owner of Just Jeans, Smiggle, Peter Alexander and much more, continue to reach all-time highs. The company has an impressive track record, a reliable dividend, and is even known to pay special dividends. Chairman Solomon Lew is one of the savviest retailers going around and continues to take the company from strength to strength.

Another promising retailer is Retail Food Group Limited (ASX: RFG), the owner of Gloria Jean’s, Crust Pizza, Donut King and much more. Like Premier, it has an excellent track record of delivering for shareholders and pays a solid dividend. Plenty of long-term growth is also on the table in the form of an international coffee expansion.

Foolish takeaway

They say a happy customer tells three people, an unhappy customer tells 10. Remember that if you’re ever thinking of buying a retail company’s shares. Indeed, make sure it’s well-run, with managers who are incentivised to act for shareholders’ long-term benefit and that its services/products are first-rate. If an investor doubled checked their Dick Smith investment against those three criteria, chances are, they could’ve saved themselves a lot of money.

A better buy than Dick Smith

Forget Dick Smith, This "dirt cheap" company. is growing like gangbusters, and trading on a 5.6% dividend yield, FULLY FRANKED (8% gross). With interest rates set to stay at these low levels for years to come, for income-hungry investors, including SMSFs, this ASX company could be the "Holy Grail" of dividend plays for 2016. Click here to get our FREE investment report, including the name of this fast growing ASX dividend share. No credit card required.

Motley Fool writer/analyst Owen owns shares of Retail Food Group.

Owen welcomes your feedback on Google plus (see below), LinkedIn or you can follow him on Twitter @ASXinvest.

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia owns shares of Retail Food Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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