Investors certainly aren’t lacking metrics that can be used when evaluating companies: P/E ratio, PEG, ratio, Interbrand Top 100 Global Brands list, to name a few. Sometimes company stock prices move the way measures like these indicate they might, although not always. But there’s another interesting way to evaluate retailers.
First we’ll take a quick look at the method. Then we’ll dive into which retailers look most attractive based on this measure and why.
Q & A
The Q ratio is a measure of a company’s market cap (or its share price times number of outstanding shares) to the replacement cost of its assets. The larger a company’s Q ratio, the greater the share of its value originates from intangible assets (think brand equity, customer loyalty, and innovation). Put simply, the greater its ratio, the more likely a company’s prospects for relevancy and survival. After all, in the world of retail, commoditization is akin to a death knell.
Not surprisingly, the highest Q ratio retailers possess blockbuster brand names. Take a look at the top five publicly held U.S. retailers by Q ratio.
|Company||Q Ratio||5-Year Stock Return|
|Coach, Inc. (NYSE:COH)||4.98||60%|
|Apple Inc. (NASDAQ:AAPL)||4.26||242%|
|Amazon.com, Inc. (NASDAQ:AMZN)||4.03||249%|
|Whole Foods Market, Inc. (NASDAQ:WFM)||3.91||135%|
|Tractor Supply Company (NASDAQ:TSCO)||3.85||372%|
All five of these retailers boast Q ratios significantly greater than the U.S. composite retailers’ ratio of 1.59. Apparel/footwear boasts the highest Q ratio of all retail formats. Its composite Q ratio of 3.05 is nearly six times that of department stores, signaling the significance of brand image in this cutthroat industry. Not surprisingly, Apple dwarfs the electronics specialty industry. While this industry has a composite Q ratio of 2.65, its ratio plummets to 0.42 when Apple is plucked from the group.
Avoiding the big C in retailing is achieved by building strong brand equity and a fiercely loyal customer base. Coach represents one of the strongest brands in the handbag and accessories market. And as global demand for luxury goods increases, the company’s loyal customers enable profitable expansion into new markets. Considered accessible luxury, Coach’s products allow the company to capture a piece of luxury spending while having a broader consumer base than the very high-end brands. And Coach has managed to be accessible without degrading its brand image.