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How to Invest in “Cookie Cutter” Stocks

November 11, 2014



When a firm produces a successful formula in one store and then replicates it over and over—in malls and in locations around the country or around the world—it’s a cookie cutter. Think of McDonald’s, Walmart, Starbucks, Taco Bell, The Gap, Home Depot, Starbucks, Chili’s, Cracker Barrel, The Limited, Dick’s Sporting Goods, Wendy’s, Outback Steakhouse, and Costco Wholesale, which are great examples of successful rollouts of the cookie cutter concept.

 

As you can see, many of the names that achieve success with the cookie cutter business model are in the retail area. With this concept, when a company expands into new markets, bringing on new stores rapidly (especially if same-store sales are brisk as well), earnings can accelerate at a healthy sustained pace. These types of companies are some of the easiest to spot, monitor, and invest in during their high-growth phase. Their earnings up cycles last for a long enough time for you to identify earnings growth “on the table” while they still have plenty of growth in the future.

 

Points to Consider When Investing in the Cookie Cutter Model

 

Same-store sales, or what is also referred to as comparable store sales (comps), are a very important statistic used for analysis of the retail industry. This statistic compares sales of stores that have been open for a year or more. This allows investors to determine which portion of new sales has come from sales growth and which portion from the opening of new stores.

 

This analysis is important because although new stores are a major part of a company’s expansion and earnings growth, a saturation point in which future sales growth is determined by same-store sales growth eventually occurs. With these comparisons, analysts can measure sales performance against other retailers that may not be as aggressive in opening new locations during the evaluated period.

 

You want to see same-store sales increasing each quarter. High-single-digit to moderate-double-digit same-store sales growth is high enough to be considered robust but not so high that it’s unsustainable (25 to 30 percent or more same-store sales growth is definitely unsustainable over the long term).

 

In general, same store sales growth of 10 percent or more is considered healthy.

 

What factors affect same-store sales?

 

The two main factors are prices and customer volume. By measuring the sales increase or decrease in stores that have been open a year or more, you can get a better feel for how a company is really performing, because this measure—same-store sales—takes store closings and chain expansions out of the mix.

 

Rising same-store sales means that more customers are buying product at the stores or are spending more than they did a year ago or some combination of the two. This is a sign that management’s marketing efforts are paying off and that the brand is popular with consumers.

 

Falling same-store sales obviously represents a problem. Weakening comps could mean one of a few things:

 

• The brand is losing strength, and people aren’t shopping at the company’s stores.

 

• The economy is worsening, and people aren’t interested in shopping anywhere.

 

• The company has too many items at discount prices, and dollar volume per customer is less than usual.

 

Some companies grow by franchising their business or through a combination of company-owned and franchised stores. Although franchise fees can lead to big profits for the franchisor, the earnings are considered lesser quality than a company-owned base with less earnings stability.

 

If the company franchises a relatively high percentage of new store openings, the risk of store failures and an earnings disappointment is heightened. In 2007, McDonald’s, one of the best- run franchise cookie cutter models in history, had about 60 percent of its restaurants operated by franchisees.

 

Another important consideration for the cookie cutter model (particularly if the business concept is relatively new) is a past track record of success in diverse geographic locations (Northeast, South, Midwest, international, etc.). You want to get evidence that the model is scalable. In addition, too much, too fast can be a red flag. For most companies, opening more than 100 stores per year is a number that is difficult to maintain.

 

In 2006, Starbucks opened 1,102 more stores than it had the previous year; Starbucks’ stock price peaked and fell 82 percent over the next 24 months. By 2011, Starbucks had fewer stores open than it did in 2008. Other key metrics to consider include comparing sales per square foot and sales per dollar of capital invested per unit with other companies in the same business.

 

Excerpt from Trade Like A Stock Market Wizard by Mark Minervini (McGraw Hill Publishing –2012)

 

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