A company can sell different types of products. Generally, they are classified into the following categories:
Hard Goods - These types of goods include appliances, electronics, furniture, sporting goods, etc. Sometimes referred to as "hardline retailers."
Soft Goods - This category includes clothing, apparel, and other fabrics.
It is important to understand the key benchmarks that are used to analyze a company's performance. Here are some things to consider:
Sales per Square Foot: Sales / Square Footage
Store space is considered to be a productive asset and the key to profitability. Successful companies generate as much sales volume as possible out of each square foot of store space.
Inventory Turnover: Sales / Inventory or Cost of Goods Sold / Average Inventory
This ratio shows how many times the inventory of a firm is sold and replaced over a specific period. It should be compared against similar retail companies or the industry average. A low turnover might imply poor sales and, therefore, excess inventory. A high ratio implies either strong sales or ineffective buying from suppliers.
When analyzing a particular retailer, the following factors need to be considered:
Competitors - The number and size of direct competitors is important. Ideally, you want the company to have as little competition as possible, but this rarely happens. Determine who the direct competitors are and how they are all positioned in the market. A smaller regional discount store might find it tough to compete with new Wal-mart stores opening up every month. Take a look at the big picture, find out what differentiates the company from its competitors. Do they have better prices, service, or offer higher quality goods than their competition? Grocery stores might find it hard to differentiate themselves from competitors: after all, an apple is an apple. Higher-end retailers, however, may have an easier time as they try to compete on service or quality.
Size of the Market - Determining the overall size of the market gives us an indication of the potential for the market. If you had the choice between a company with a 25% share of a $10 million market or a 25% share of a $1 billion market, which one would you chose?
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