5 ecommerce and retail brands have more than doubled the S&P 500 return over the past 12 months.
To put this in context,
→ Only 14 companies of the 50 public companies in the Elephant Herd Index had positive 12 month returns (Feb 1, 2023 to Feb 1, 2024).
→ 8 companies met or beat the performance of the S&P 500 (+19%) over that time period
→ 5 companies (The Elite 5) doubled or more than doubled the S&P 500.
So, what makes these 5 companies special? I decided to rank the Elite 5 by various attributes that are commonly discussed as drivers of valuation to see what might be driving their superior price performance. I ranked them by:
- revenue growth
- margins
- marketing efficiency
- free cash flow generation
- capital efficiency
- return on capital
Quick note on the ranking. I used the Elephant Herd Index where I pull data for public DTC, omnichannel, retail and luxury brands. As commerce becomes increasingly omnichannel, the Index is meant to provide leaders with insights into how peers and adjacent segments are doing. The Index currently has 50 companies and I am adding more, so it is not an exhaustive list.
Some impressive growth from ELF. And LULU looked good too. But DECK, WSM and COST didn’t blow the doors off growth.
Obviously strong margins for the top 4. And margin isn’t Costco’s game. The Elite 5 were not ranked in the top 5 on margins, but ELF and DECK fell just outside on Net Income Margin %.
The hypothesis here is the lower the percentage the better because it shows the company needs to spend less to generate revenue which may signal stronger repeat purchase dynamics from its customer base and stronger brand awareness that is cheaper to convert to sales.
I was expecting to see Sales & Marketing as a percent of revenue to be low. While none of the Elite 5 cracked the top 5, DECK, LULU and WSM look pretty strong on this account. And I can excuse ELF because they are at an earlier stage than the others and thus still pushing acquisition hard.
Costco doesn’t break out just Sales & Marketing, so I looked at SG&A. Unsurprisingly for a value focused mass retailer with a membership model, their SG&A costs were low and an impressive second best.
The Elite 5 know how to generate their own cash with some impressive conversion percentages. DECK cracks the top 5 here at 20%. Costco’s low margin model means it will score low here. So, clearly ability to generate cash flow is important, but one among many factors.
Obviously I am comparing apples and oranges both in terms of type but also business model. And Capital Efficiency rankings made this stark. That said, I was frankly surprised at how low the rankings were for everyone except COST. So, not much to learn other that none of the Elite 5 have cash conversion cycles greater than 169 days.
I finally looked at one of my favorite metrics - Return on Capital (ROC).
I would prefer ROIC, but Koyfin does not automatically compute ROIC. Maybe that is because there is so much nuance to the calculation. For one, there are two methods for calculating it - financially or operationally. Getting to NOPAT (Net Operating Profit After Taxes) requires some work. For example, is the company making adjustments to Net Operating Profit that need to be accounted for and you need to know the companies’ tax rates. In the Operationally calc, you need Net Working Capital which in and of itself has different definitions (e.g. do you include cash?) and how do you handle Goodwill and Intangibles? In the financial calc, you need clean shareholder equity which is pretty straightforward for public companies but can be messy for private companies.
Since my goal is to help private company leaders and the purpose of the Index is to help them gain insights from public companies, I have decided that while I like ROIC in theory, it is too much work in practice. In other words, I am not going through the brain damage for 50 companies once a month.
Because of all that, some people use ROC as a proxy for ROIC, so for now, we will too.
And finally we had some obvious answers. DECK, LULU and WSM just crush on ROC. ELF and COST are pretty impressive too.
Once it was clear that ROC is a critical metric, I wanted to see which companies filled out the top 12. In other words, which companies are ranked 2, 4, 5, 7, 8, 9 and 11.
Seeing the table above, it’s clear that ROC isn’t a great predictor of stock performance. SBUX, ULTA and YETI all have negative 12 month share price performance. On the other hand, both OR and TJX managed to roughly match the S&P.
But when you look at the combined list of companies ranked by ROC
- Deckers Outdoor
- Home Depot
- Williams-Sonoma
- Starbucks
- Hermes
- Lululemon
- Ulta
- TJX
- Yeti
- e.l.f.
- L’Oreal
- Costco
A different picture emerges. ROC is a great predictor of great companies.
An idea for a future post is testing for ROC as an initial screen to performance. But my interest here is not stock picking. I am interested in helping founders achieve the payoffs they have worked so hard to earn. If we think of our companies as machines designed to maximize returns given various capital inputs, then ROC is a great (the best?) metric to measure success.
A footnote on ROE
I know that public market investors likely prefer Return on Equity (ROE). But I am writing for private companies who are trying to succeed by learning from public companies. And private companies, especially in this market, are a hodgepodge capital structure with lots of different debt on top of the equity. I believe ROC gives a more complete picture and is more useful as a guide for private company leaders.